ASYMMETRIC INFORMATION BETWEEN BUYERS AND

SELLERS IN THE RESIDENTIAL PROPERTY MARKET:

A HEDONIC PROPERTY VALUATION APPROACH

THIS DISSERTATION IS SUBMITTED TO THE QUT BUSINESS SCHOOL,

QUEENSLAND UNIVERSITY OF TECHNOLOGY FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

2014

S.N.S.L.H.P. NEELAWALA
B.Sc. (Agriculture Sp.), University of Peradeniya, Sri Lanka
M.Sc. (Environmental Economics), University of Peradeniya, Sri Lanka
M.B. (Economics), Queensland University of Technology, Australia

School of Economics and Finance

QUT Business School
Queensland University of Technology
Gardens Point Campus
Brisbane, Australia
Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet

requirements for an award at this or any other higher education institution. To the

best of my knowledge and belief, the thesis contains no material previously

published or written by another person except where due reference is made.

QUT Verified Signature

……………………………..
S.N.S.L.H.P. Neelawala
17th September, 2014

i
ACKOWLEDGEMENTS
I am most grateful to the School of Economics and Finance, Queensland University of

Technology (QUT) for providing me a scholarship to conduct my doctoral research. This has

enabled me to achieve a long held academic dream and realise the motto “If you believe you can

do something, then you will have the ability to do it”.

In this difficult but always interesting journey of learning and research a number of people have

been of great assistance. First, I am most grateful to my principal supervisor, Professor Clevo

Wilson for his always valuable advice and guidance throughout the period of my thesis research.

My thanks to associate supervisors, Doctor Louisa Coglan and Professor Tim Robinson for their

ongoing interest in my work and their valuable comments, and to Doctor Mark McGovern for

numerous comments as panel chair in the final thesis seminar.

I am also most appreciative of the friendly research environment which all the staff and

colleagues in the School of Economics and Finance created for me. My thanks to the Head of

School, Professor Michael Kidd for his approval of an extension to complete the thesis, and to

Professor Stan Hurn and the NCER (National Centre for Econometric Research) for making

funds available for me to attend conferences and workshops during the last three years. To my

parents, a special thanks for providing constant support and encouragement throughout the

period of my doctoral research.

I would like to thank Doctor William Wrigley for his professional editing service and valuable

comments offered. I am also grateful to Jeremy Webb for additional editorial comments.

Finally, I thank my wife, Sawani Karunaratne, for keeping me smiling even in difficult times.

ii
TABLE OF CONTENTS
ACKOWLEDGEMENTS ............................................................................................................................................ ii

LIST OF TABLES .................................................................................................................................... viii

LIST OF FIGURES ...................................................................................................................................................... x

KEY WORDS ............................................................................................................................................................... xi

ABSTRACT ................................................................................................................................................................. xii

CHAPTER ONE:

INTRODUCTION ........................................................................................................................................................ 1

1.0 Introduction .............................................................................................................................................................1

1.1.1 Research objectives .........................................................................................................................................6
1.1.2 Research questions ..........................................................................................................................................7
1.1.3 Expected contributions ....................................................................................................................................8
1.1.4 Contributed papers related to the methodology of this study ......................................................................11
1.1.5 Structure of the thesis ...................................................................................................................................12

CHAPTER TWO:

THE WESTERN BRISBANE TRANSPORT NETWORK (WBTN) SCHEME ....................................... 14

2.0 Introduction ...........................................................................................................................................................14

2.1 Transport corridor options proposed under the WBTN scheme ...........................................................................22

2.2 New road corridors proposed under the western Brisbane transport network ...................................................24

2.3 The Everton Park to Kedron road corridor ............................................................................................................31

2.4 The Everton Park to Albany Creek bus and rail corridors ......................................................................................33

2.5 The general public’s understanding of the road corridors ....................................................................................35

2.6 The effect of WBTN on surrounding property prices: an economic perspective ..................................................36

2.7 Chapter summary ..................................................................................................................................................39

iii
CHAPTER THREE:

EXAMINATION OF HEDONIC PROPERTY PRICE ANALYSIS AND THE ISSUE OF

ASYMMETRIC INFORMATION IN RELATION TO WBTN ...................................................................... 41

3.0 Introduction ...........................................................................................................................................................41

3.1 Sources of externalities which affect property prices ...........................................................................................42

3.1.1 Noise and property prices..............................................................................................................................42
3.3.2 Air pollution and property prices ...................................................................................................................50

3.2 Spatial effects ........................................................................................................................................................54

3.3 Before and after hedonic models ..........................................................................................................................56

3.4 The functional form of the hedonic function and theory .....................................................................................57

3.5 The efficiency of using hedonic models for damage cost assessment .................................................................61

3.6 Akerlof’s lemon model and the hedonic price method .......................................................................................62
3.6.1 Decision making under asymmetric information ...........................................................................................62
3.6.3 Adverse selection and the residential property market ................................................................................72
3.6.4 Research methodology and the analytical framework ..................................................................................74
3.6.5 The temporal effect of information on decision making in the residential property market........................86
3.6.6 The proposed property buyers’ decision-making process .............................................................................86

3.7 Chapter summary ..................................................................................................................................................89

CHAPTER FOUR:

HEDONIC SPATIAL ANALYSIS: AN INNOVATIVE APPROACH........................................................... 90

4.0 Introduction ...........................................................................................................................................................90

4.1 Space matters ........................................................................................................................................................91

4.2 Literature review of spatial analysis and needed theoretical improvements .......................................................93

4.3 The spatial weight matrix and its properties .......................................................................................................100

4.4 Important features of spatial weight matrices ....................................................................................................109

4.4.1 Contiguity weight matrix..............................................................................................................................109
4.4.2 Row standardised contiguity weight matrix ................................................................................................109
4.4.4 Direct distance based weight matrix with distance decay...........................................................................110

4.5 Contrast between Euclidean distance and geographical coordinate processes..................................................111

iv
4.7 Data collection method .......................................................................................................................................111

4.8 Spatial autocorrelation ........................................................................................................................................113

4.8.1 Spatial lag model ..........................................................................................................................................113
4.8.2 Maximum likelihood estimation ..................................................................................................................114
4.8.3 Spatial error model ......................................................................................................................................115
4.8.5 Spatial mixed model.....................................................................................................................................117
4.8.6 Spatial model selection criteria ...................................................................................................................117

4.9 Comparison of the use of projected coordinates and geographic coordinates for spatial analysis ....................120
4.9.1 Results and discussion .................................................................................................................................120
4.10 Chaptesummary……………………………………………………………………………………………………………………………………........127

CHAPTER FIVE:

FIELD SURVEY AND SECONDARY DATA COLLECTION ...................................................................... 129

5.0 Introduction .........................................................................................................................................................129

5.1 Sampling and data collection...............................................................................................................................130

5.2 Secondary data collection....................................................................................................................................131

5.3 Primary data collection ........................................................................................................................................132

5.4 Survey methodology ............................................................................................................................................133

5.5 Chapter summary ................................................................................................................................................145

CHAPTER SIX:

IMPACT OF WBTN ROAD CORRIDORS ON PROPERTY PRICES: AN ANALYSIS OF EXISTING

AND PROPOSED CORRIDORS ......................................................................................................................... 147

6.0 Introduction .........................................................................................................................................................147

6.1 The WBTN project and the selected road corridors ............................................................................................149

6.2 Literature review .................................................................................................................................................152

6.3 Data and the estimated models ..........................................................................................................................155

6.4 Empirical results ..................................................................................................................................................162

6.5 Spatial lag model .................................................................................................................................................163

v
6.6 Property price variation overtime .......................................................................................................................166

6.7 Control site analysis .............................................................................................................................................169

6.7.1 Control site: Old Cleveland road ..................................................................................................................170
6.7.2 Use of the hedonic model ...........................................................................................................................173

6.8 Chapter summary ................................................................................................................................................175

CHAPTER SEVEN:

INFORMATION AWARENESS AND THE SATISFACTION OF HOME OWNERS .......................... 179

7.0 Introduction .........................................................................................................................................................179

7.1 Buyers’ information awareness ...........................................................................................................................181

7.2 Methodology applied in buyer awareness and satisfaction models ...................................................................186

7.3 Results and discussion of information awareness model ....................................................................................193

7.3.1 Functional form of the logit model ..............................................................................................................195
7.3.2 Descriptive statistics ....................................................................................................................................196
7.3.3 Logistic regression of information awareness (log- odds) ...........................................................................197
7.3.4 Logistic regression of information awareness (marginal effects) ................................................................198

7.4 Ordered probit model..........................................................................................................................................199

7.5 Results and discussion of the satisfaction model ................................................................................................204

7.5.1 Satisfaction of home buyers: an ordered probit analysis ............................................................................207

7.6 HP Regression with information variables...........................................................................................................212

7.6.1 Functional form of the combined HP model................................................................................................214

7.70 Chapter summary ..............................................................................................................................................218

CHAPTER EIGHT:

CONCLUSION ......................................................................................................................................................... 219

8.0 Introduction .........................................................................................................................................................219

8.1 Key findings .........................................................................................................................................................219

8.2 Akerlof’s lemon model and residential property market ....................................................................................223

8.3 Main conclusions and policy suggestions ............................................................................................................224

8.4 Avenues for further research...............................................................................................................................226

vi
REFERENCES ......................................................................................................................................................... 227

APPENDICES .......................................................................................................................................................... 246

vii
LIST OF TABLES
Table 2.1: Population growth in the major Australian cities………………………........ 15
Table 2.2: Proposed transport corridors in WBTN scheme……………………………… 25
Table 2.3: Community perception of EPK and EPAC……………………………… 36
Table 4.1: Definitions of variables for Mount Isa analysis….…………………………… 122
Table 4.2: Variables used for Kholo study…………………………………................. 123
Table 4.3: Mount Isa spatial regression results with projected coordinates …………….. 124
Table 4.4: Mount Isa spatial regression results with geographic coordinates…………… 125
Table 4.5: Results of Kholo study for the spatial mixed model with projected
coordinates……………………………………………………………….. 126
Table 4.6: Results of Kholo study for the spatial mixed model with geographic
coordinates……………………………………………………………….. 127
Table 5.1: Survey responses……………………………………………………………….. 136
Table 5.2: Information sources of buyers…………………………………………………. 138
Table 5.3: Level of knowledge about WBTN……………………………………………. 139
Table 5.4: Types of the buyer……………………………………………………………. 139
Table 5.5: Origin of the buyer…………………………………………………………….. 140
Table 5.6: Level of knowledge about the EPK/EPAC…..………………………………….140
Table 5.7: Summary of mortgage payments….………………………………………. 141
Table 5.8: Level of income in the two study sites…………………………………… 142
Table 5.9: Age category of buyers………………………………………………………… 142
Table 5.10: Education level of buyers..……………………………………………….. 143
Table 5.11: Gender and family composition….………………………………… 144
Table 5.12: Status of migration……………………………………………………… 144
Table 5.13: Use of an agent…………………………………………………………. 145
Table 6.1: Definitions of variables used in the regression analysis……………………….. 158
Table 6.2: Descriptive statistics for the selected variables……………………………….. 161
Table 6.3: OLS results…………………………………………………………….. 162
Table 6.4: Results for the Lagrange multiplier test………………………………. 163
Table 6.5: Results for spatial lag model …………………………………………. 164
viii
Table 6.6: Average property price variation between study and
control sites (inflation corrected) ………………………………………… 168
Table 6.7: TOM for study site and control site……………………………………… 168
Table 6.8: Definitions of variables……………………………………………….. 171
Table 6.9: Descriptive statistics…………………………………………………… 172
Table 6.10: OLS results………………………………………………………….. 174
Table 6.11: Control site’s alternative regression…………………………………. 175
Table 7.1: Definitions of variables used in information awareness model………. 195
Table 7.2: Descriptive statistics of the information awareness model…………. 196
Table 7.3: Log-odds of information awareness model…………………………… 198
Table 7.4: Marginal effects of the information awareness model……………….. 199
Table 7.5: Definitions of the variables of satisfaction model………………….. 205
Table 7.6: Descriptive statistics…………………………………………………. 208
Table 7.7: Descriptive statistics of satisfaction levels…………………………… 209
Table 7.8: Marginal effects of satisfaction model………………………. 212
Table 7.9: Definitions of variables…………………………………………… 213
Table 7.10: Descriptive statistics of the variables …...……………………… 215
Table 7.11: HP regression results with information variables……………………… 217

ix
LIST OF FIGURES
Figure 2.1: Proposed transport corridors under the WBTN project…………………….. 23
Figure 2.2: Map showing proposed changes to Stafford Road…………………………. 32
Figure 2.3: Map showing Old Northern road and immediate environs……………. ....... 34
Figure 3.1: Property value variation with the distance from noise source………........ 49
Figure 3.2: Hedonic price variation of attributes with quantity………………………….. 54
Figure 3.3: Demand for quietude/visual amenity/comfort……………………………….. 79
Figure 3.4: Density of the quality of the products………………………………………. 81
Figure 3.5: Supply of the products given the quality……………………………………... 83
Figure 3.6: The demand for the residential properties…………………………………. 85
Figure 4.1: Basic spatial patterns……………………………………………………….. 101
Figure 4.2: Spatial spill-over patterns…………………………………………………… 102
Figure 4.3: Binary symmetric spatial weight matrix……………………………………… 103
Figure 4.4: The variation of weights with normalised distance………………………….. 104
Figure 4.5: Components of geographic coordinates system……………………………. 107
Figure 4.6: Components of Cartesian coordinates system………………………………… 108
Figure 4.7: Contiguity matrix (Matrix 1)………………………………………………. 109
Figure 4.8: Row standardised or row stochastic contiguity matrix (Matrix 2)…………… 109
Figure 4.9: Direct distance based matrix (Matrix 3)……………………………………….. 110
Figure 4.10: Inverse distance based matrix (Matrix 4)……………………………………. 110
Figure 5.1: Structure of the questionnaire………………………………………………… 135
Figure 6.1: Map showing existing EPK and EPAC road corridors and the proposed
addition of new corridors……………………………………………………… 151
Figure 6.2: Impacts from transport-related infrastructure improvements………………… 152
Figure 6.3: Control site - Old Cleveland road ………………………………………….. 170
Figure 7.1: Probability density function of logit distribution…………………………… 191
Figure 7.2: Ordered probit distribution………………………………………………….. 203

x
KEY WORDS
Hedonic property price method; spatial analysis; spatial error model; spatial lag model;

information asymmetry; Akerlof’s lemon model; road corridors; information awareness

xi
ABSTRACT
This PhD thesis examines the impact of announcements of major projects, and in particular road

corridors on property prices. A particular focus is placed on the impact of information

availability/asymmetry relating to these projects on residential property markets with respect to

negative environmental externalities (spill-overs) in the absence of mandatory disclosure laws. In

the absence of such disclosure there is a potential for information asymmetry between sellers and

buyers leading to suboptimal decision making and welfare losses to buyers. To assess these

losses the effect of information asymmetry on the Marginal Willingness to Pay (MWTP) of

buyers is examined.

House buyers’ level of information of two proposed road-widening projects (corridors) under

the Western Brisbane Transport Network (WBTN) scheme in Queensland are used for this

purpose. A detailed literature review shows the paucity of studies which have been undertaken

on this topic.

The thesis is divided into two main sections. In the first part, hedonic property price models are

used under the assumption of perfect information. The results clearly demonstrate that

announcements of major projects such as the construction of additional road corridors do have an

impact on property prices. In the second part, relaxing the assumption of perfect information, the

thesis examines the extent of information asymmetry in the two study sites drawing on Akerlof’s

‘lemon model’. In addition, the thesis examines the factors determining buyers’ ‘information

awareness’ and the types of amenities influencing buyers’ current level of satisfaction.

The study has important policy implications for minimising the negative effects of

announcements of major projects on property prices through enabling mandatory disclosure laws

xii
in housing transactions. The research findings show that out-of-area first-time buyers who have

low access to information, have paid higher prices compared to the rest of the buyers. Moreover

those who searched for properties before buying paid lower prices compared other buyers.

This PhD research is based on the spatio-temporal analysis of property sales. Further research is

warranted into hedonic repeat sales where the fixed and time-varying effects on property prices

are taken into account.

xiii
CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION

This thesis addresses the issue of sub-optimal decision making which arises from asymmetric

information in property markets, especially in relation to environmental attributes, an issue which has

rarely been addressed in the literature. For this purpose the hedonic price method (HP) is employed

which uses the collective value of implicit prices of components of a product to predict its total price.

Although many HP studies have examined the effect of environmental disamenities on property prices

(Hamid & al-Murshid, 2008; Palmquist, 1992; Palmquist & Smith, 2002), there has been a marked

absence of studies which examine the effects of asymmetric information on the property market. Such

a situation is likely to produce inefficient parameter estimates in the HP function leading to a

misspecification of welfare effects (consumer and producer surplus).

Following Rosen’s (1974) landmark paper on the HP methodology, a wide range of theoretical and

empirical studies have been conducted which have provided greater econometric accuracy to the HP

literature. HP studies dealing with environmental issues have mainly focused attention on

environmental valuation. However the costs involved as a result of information asymmetry have

received very little attention (Stigler, 1961). The few existing studies have focused attention on

disclosed information and its effect on property prices. However, there is no proper theoretical

background which takes account of information asymmetry problems between buyers and sellers. No

1
studies were found that considered the impact of announcements of development projects which

produce environmental disamenities and their effects on the residential property market.

It is found that in a transaction, buyers using available public information do not have access

to all private and public information that sellers possess (Akerlof, 1970). This can create an adverse

selection situation. A recent study by Pope (2008) investigated the effects of seller disclosure

requirements with regard to airport noise pollution from the Raleigh-Durham International Airport,

USA. The analysis, based on the effect of disclosure requirements on housing prices, concluded that

house prices were affected when noise impacts from the airport were disclosed to potential buyers. In

Pope’s study, the sellers only provided already publicly available information to buyers that might

have led to an ambiguity, since pre-disclosure property prices were likely to have taken this impact

into consideration. Therefore, before and after disclosure price changes could not account for the

discount in value created by the impact of noise. Furthermore, it is important to consider the level of

information asymmetry in the estimation, since the HP analysis assumes that full information should

be available to buyers and sellers when a transaction decision is made. Accordingly, it is assumed that

small changes in attributes can reveal their own marginal prices at an ‘equilibrium price locus.’

In this study, the impact of asymmetric information is evaluated with respect to the announcement of

the construction of road corridors and other environmental dis-amenities in selected locations in the

absence of mandatory disclosure laws. In the published literature, there is no known study that has

sought to resolve this issue. Hence, this thesis addresses an important research gap by showing how

potential solutions can be mapped for resolving the long term problem which emerges in a property

market due to information asymmetry and which results in sub-optimal transaction decisions. Field

surveys are used to show how such solutions can be achieved.

2
For the purpose of these surveys the proposed WBTN1is selected on the basis of the extent of the

expansion and identified negative externalities on nearby houses. The central hypothesis is that there is

an asymmetry of information between buyers and sellers in the property markets which impacts

negatively on buyers’ MWTP estimates. This hypothesis is tested using the HP approach, the level of

information disclosure, the public’s (buyers) level of knowledge at the time of purchase, and their

satisfaction with the current location as a function of expected negative externalities due to the

announcements and the current level of environmental dis-amenities. In addition to the above-

mentioned sites, a control site alongside the Old Cleveland road covering the suburbs of Carrindale,

Camp Hill, Carina Heights and Coorparoo is used to allow a comparison with the price discounting

that may arise due to dis-amenities from the construction of roads.

The issue of asymmetric information in the property market is examined by use the Akerlof’s (1970)

pioneering theoretical work in relation to the automobile market. Akerlof showed that in the

automobile market, sellers have more information than buyers and hence a distortion in prices is based

on the availability of information to potential buyers. For the purposes of this thesis Akerlof’s theory

is modified where necessary to provide the theoretical framework to explain the potential existence of

asymmetric information in the property market with regard to the announcement of the construction of

road corridors which is assumed to be latent information for some buyers.

Akerlof’s work relates to a private good where the seller has more information about the product than

the buyer. In the case of houses, although a property is a private good and the seller has more

information about the property, information about the announcement of proposed corridors are, at least

1
The author is aware that the WBTN commenced in .May, 2009. However, work on the selected corridors for this study
had not commenced at the time of writing this manuscript (April 2014).

3
theoretically, accessible to all. Nevertheless, it is assumed in this study that sellers have more

information than buyers regarding the announcements of road corridors. This assumption is based on

Pope’s (2008) work on the effect of aircraft noise from an airport on nearby property prices. Thus the

effects of asymmetric information on the property market are analysed using the HP approach used by

Pope (2008) and by assuming that the residential property market, too, suffers from adverse selection

arising from asymmetric information.

In this study therefore it is assumed that there is a considerable information gap between buyers and

sellers, especially in relation to environmental disamenities arising from the announcement of

proposed corridors. Although this is mainly due to the lack of information provided by sellers, studies

show that the information gap can also be exacerbated by the extent of the geographical distance

between buyers and sellers (Garmaise & Moskowitz, 2004). This issue is therefore also examined in

this thesis.

Also of relevance is Garmaise and Moskowitz work (2004) which argues that information

considerations are all the more important in the real estate market, given its illiquidity (a market may

be considered liquid if there are ready and willing buyers and sellers in large numbers) and, therefore,

price signalling is not sufficient to provide information to market participants. Hence, Akerlof’s

(1970) explanation of the ‘lemon’ market in automobiles has the potential to be used to explain what

occurs in the real estate market as well. That is, Akerlof’s theoretical explanation can be used as a

benchmark for explaining the asymmetric information effects in a given market, be it car or real estate.

This thesis, therefore, uses this explanation as a benchmark and develops a further theoretical

extension relating to the way in which the quality of information and its verifiability affects buyers’

decisions to the quality of information where it can be categorised as verifiable and non-verifiable.

4
Numerous studies have examined the problem of information asymmetry in a variety of markets which

include the used car market (Genesove, 1993; Porter & Sattler, 1999), labour market (Landers,

Rebitzer & Taylor, 1996), litigation situations (Daughety & Reinganum, 1992) and the software

contracting market (Banerjee & Duflo, 2000). However, insufficient work has been conducted in

relation to the distortions that arise from asymmetric information in the housing market. In this

context, an empirical investigation of the impact of announcements of proposed road corridors and

asymmetric information relating to them, fill a specific and an important gap in the HP valuation

literature.

Furthermore, in this study the importance of buyers’ level and quality of information is examined

when a purchasing decision is made. This intuition has not been addressed thoroughly in the literature

except in a few studies in financial economics (Jullien & Mariotti, 2006). This idea is rarely and

incompletely addressed in information economics and in the adverse selection literature. Hence, in this

study the problem of quality of information is analysed in respect of the number of buyers using

verifiable information for decision-making. The assumption here is that the availability and quality of

the information used for decision making has a significant impact on the final price of a residential

property, and that verifiable information plays a significant role in this process.

5
1.1 RESEARCH OBJECTIVES, QUESTIONS, MOTIVATION AND
CONTRIBUTION
1.1.1 RESEARCH OBJECTIVES

Very few studies have been conducted in relation to asymmetric information and the HP method, and

no study has contemplated the effect of information asymmetry regarding announcements of proposed

projects and the resulting environmental disamenities. Therefore, the following objectives are

proposed for this study:

1. Estimate variations in property prices using the HP approach with respect to environmental

dis-amenities arising from the proposed construction of the Western Brisbane Transport

Network Scheme. Undertake as an extension to the study, the impact on property prices of the

proposed Kholo Creek Haul Route in Ipswich and of mining and smelting activities in Mount

Isa on property prices.

2. Identification of a control site not affected by environmental dis-amenities due to the proposed

road corridor expansion. Undertake in addition a comparison between the study and control

site based on MWTP and estimate the welfare changes due to information gaps.

3. Identification of environmental amenities to allow an estimate of the hedonic functions (see,

for example, Leggett & Bockstael, 2000; Lutzenhiser & Netusil, 2001; Mahan et al., 2000;

More et al., 1988).

4. Evaluate the buyers’ level of information awareness on the proposed announcement of

infrastructure/evidence of dis-amenity levels of the project. Analyse the effect of asymmetric

information on decision-making based on this information.

6
 5. An assessment of vulnerable social groups due to this market failure, with respect to the

economic and social hierarchy of buyers will be considered. A probit model to evaluate their

existing knowledge about announcements and existing environmental amenities/dis-amenities

will examine residents’ level of satisfaction for their current location.

6. The impact of spatial autocorrelation on property prices will be examined. Spatial

autocorrelation methods [e.g. Spatial Autoregressive (SAR) method and Spatial Error Model

(SEM)] will be used to estimate the parameters in the presence of spatial autocorrelation.

1.1.2 RESEARCH QUESTIONS

This study investigates the effect of asymmetric information on buyers’ decision-making and its

impact on MWTP for property attributes. To achieve this research aim, the following research

questions will be addressed:

1. What is the cost of negative externalities generated by road corridors?

2. What is the difference between the anticipated (road corridor expansion) externalities of the

study site and the control site?

3. What is the difference between the effects of environmental externalities (both positive and

negative including those relating to the road corridor expansion) of the study site and the

control site with respect to the ‘before and after’ WBTN and ‘with and with-out’ WBTN

analyses? What is the impact of these externalities on property prices?

4. What are the types of environmental amenities/dis-amenities that have the largest impact on

home buyers? What is the influence of environmental externalities on housing quality? To

what extent do information asymmetries produce a negative impacts on house prices? How

7
 can the welfare difference between affected (study site) and non-affected parties (control site)

be demonstrated?

5. What is the degree to which information asymmetry exists between buyers and sellers (real

estate agents) and the quality of information impacting on MWTP? What is the level of

information awareness?

6. Which groups (e.g. those formed by income level, status of migration, level of education) are

most vulnerable to information asymmetry and what is the level of impact on buyers’

satisfaction of the housing service they receive?

7. What is the impact of spatial autocorrelation/spatial dependence on property price

determination?

1.1.3 EX PECTED CONTRIBUTIONS

Studies in the fields of economic and finance have well-established that insufficient or asymmetric

information between parties leads to suboptimal decision making. As a result, one party (less

informed) is disadvantaged compared the other party (better informed). This issue has been addressed

by various studies related to finance (Frieden & Hawkins, 2010; Garmaise & Moskowitz, 2004),

internet transactions (see, for example, Kennes & Schiff, 2007), environmental studies (see, for

example, Bergstrom et al., 1990; Gayer, Hamilton & Viscusi, 2000) and the used car market (Akerlof,

1970). However, it has been infrequently addressed in studies relating to the residential property

market. Where such studies have been made (Fiva and Kirkeboen, 2008; Palm, 1981; Pope, 2008;

Stanley, 1991; Wiley & Zumpano, 2009) they have been undertaken under conditions in which full

disclosure of information is made when a property transaction is carried out. Indeed this is a basic

assumption in HP valuation. However, there is no known study conducted to determine the effects of

8
information gaps on real estate property transactions when full disclosure of information is not

provided. This intuition and research gap has therefore motivated this study which mirrors the

phenomenon explored by Akerlof (1970) but is applied to the real estate property market and the

effects of information asymmetry.

This study examines the buyers’ awareness of available information (public information). In doing so,

there is an a priori expectation that all buyers do not have access to the sellers’ private and public

information about the environmental disamenities anticipated from proposed corridors, and the

converse is also expected. Hence, it is assumed that the seller is at an advantage over the buyer in the

transaction. In Australia, there is no legal requirement for a full disclosure of information when a

property transaction is made. Hence, there is a tendency for market failure to occur, as suggested by

Akerlof (1970). However the literature has rarely considered the effect of the use of verifiable

information by buyers when a transaction occurs, other than in a few finance literature studies (Jullien

& Marriotti, 2006). In this study therefore, we assess the effect of buyers’ use of verifiable and non-

verifiable information prior to a transaction. In the study area selected in this thesis there were

significant community responses to the announcement of negative environmental effects and the issues

of land resumptions (Western Brisbane Transport Network Investigation: Basis of Strategy Report,

2009). It is hypothesised that this should be reflected in market transactions once the level of

information pertaining to each buyer is controlled. The literature, however, has not sufficiently

addressed the issue of information asymmetries of anticipated externalities arising from proposed

development projects. It is assumed that this uncertainty of information would lead the buyer to

behave in a protective manner, thus creating the possibility of a ‘lemon’ market. It is this intuition

which leads to the application of Akerlof’s (1970) hypothesis to this study.

9
The empirical testing of the effects of asymmetric information is carried out through hedonic valuation

and logistic/probit regression analyses providing a valid foundation to detect the convergence of a

buyers’ expectation price and comparison with an average price in the market.

Therefore, the main contribution of this study is to fill a research gap in the literature that shows the

effect of information asymmetry on property prices without mandatory disclosure laws. In this study

the buyers’ level of information is captured through several models. In contrast, almost all the hedonic

studies in the literature have been conducted under the assumption of full information availability or in

the presence of mandatory disclosure laws (Palmquist, 1992; Pope, 2008). However, in the former

case, the hedonic coefficients are inefficient because it does not account for differentials in knowledge

each buyer possesses about the properties they buy. Mandatory disclosure laws are likely to result in a

more reliable estimate of MWTP values and can therefore have a number of policy implications.

Hedonic studies are useful in deciding compensation payments on the basis of MWTP values. For

example, the US Environmental Protection Agency has used the results of the Ridker and Henning

(1967) study to develop compensation programmes for those affected by metropolitan air pollution.

Such a study is useful to determine compensation for negative externalities/dis-amenities such as those

resulting from road corridor projects.

This study also investigates the effect of the intuition of Akerlof’s model in the presence of

asymmetric information. In such a scenario, it is possible to theoretically evaluate buyers’ divergence

from the average price estimation when buying a property and to show how to correct market

inefficiencies faced by less informed parties.

10
1.1.4 CONTRIBUTED PAPERS RELATED TO THE METHODOLOGY OF THIS
STUDY

Three papers have been produced using the hedonic methodology that was developed and applied in

this thesis. The contribution of the papers varies based on the studies involved. Each study discusses

policy instruments for welfare maximisation of affected parties. The papers are as follows:

1. The impact of mining and smelting activities on property prices: a study of Mount Isa city,

Queensland, Australia.

This paper is published in the Australian Journal of Agricultural and Resource Economics - an

A ranked journal. The paper investigates the impact of mining and lead smelters in Mount Isa,

North Queensland, Australia. Several hedonic spatial analyses, such as spatial lag, spatial

error, and geographically weighted regressions are used.

2. What impact does an announcement of a proposed quarry road have on property values? An

empirical analysis.

This paper which has been submitted to an A ranked journal investigates the impacts of

announcements of Kholo Creek (Queensland, Australia) quarry haulage route developments on

nearby property prices. The hedonic spatial mixed model is used for the analysis. The paper

clearly shows the negative impact of proposed major projects on property prices which occur

before the commencement of these projects.

3. Impact of road corridors on property values: an analysis of existing and proposed corridors.

This paper has been submitted to an A ranked journal. Chapter Six is based on the results of

this paper, which uses a hedonic spatial lag model in its analysis. The paper provides empirical

evidence that major transport corridors do have a negative impact on property prices and that

11
 impacts commence from the time the announcements are made. The study therefore points to

important policy implications.

1.1.5 STRUCTURE OF THE THESIS

The aim of this thesis is to investigate the possible negative impacts from the WBTN transport

improvement scheme on nearby property prices utilising the theoretical background of Akerof’s

(1970) information asymmetry model.

Chapter Two provides a comprehensive account of the background information of the WBTN scheme,

including a detailed description of the announcements of proposed road corridors. Chapter Three

provides the theoretical background of the hedonic method and the justification for the use of the

Akerlof’s information asymmetry model in the thesis. An extension to the use of available information

for decision-making with regard to the knowledge of buyers is provided. The combination of these

theoretical ideas support the awareness and satisfaction models discussed in Chapter Seven. The

hedonic method also provides the necessary background for Chapter Four, which discusses the

hedonic spatial analyses in depth.

In Chapter Four, a comprehensive theoretical and empirical analysis of the hedonic spatial analysis is

undertaken. The previous hedonic spatial analysis is explored in depth and the weaknesses of the

contemporary analytical techniques are addressed. The analytical techniques developed in Chapter

Four are applied in the thesis and to the journal articles produced in parallel to this study.

Chapter Five describes the field survey methodology and data collection. It provides a basic

understanding of the type of data used in this study and how they have been arranged for the analysis.

Chapter Five further describes the methods used in the questionnaire’s development, and in data

collection used the field survey. The primary and secondary data are discussed in detail.

12
Chapter Six provides information about the empirical analysis of the WBTN study. The methodologies

developed in Chapters Three and Four are used in Chapter Six. Chapter Seven provides the theoretical

and empirical information about the awareness of proposed corridors through information awareness

model under the WBTN scheme and satisfaction model which empirically analyse buyers’ level of

awareness based on publicly available information and their derived satisfaction from residing in the

existing property.

Chapters Five, Six and Seven provide the empirical evidence for the information asymmetry. In these

three chapters, the main intention is to find the factors affecting information asymmetry and the

welfare change it generates. Also, in the Chapter Seven the assumption of perfect information is

relaxed and all the analyses are controlled for information effects.

In the final chapter, key findings and conclusions are discussed. The findings of each chapter are

discussed with respect to policy formulation. Possible improvements to and weaknesses in current

policies are explored.

13
CHAPTER TWO

THE WESTERN BRISBANE TRANSPORT NETWORK

(WBTN) SCHEME
2.0 INTRODUCTION

The focus of this chapter is to provide a background to the WBTN scheme. Examined are the proposed

transport corridors and population variation in South East Queensland, and the increasing need for

implementation of the WBTN scheme. Establishment of the WBTN scheme is shown to be a product

of two key causes, the first being increasing population. South East Queensland, with a current

population of approximately two million, has been attracting nearly 55,000 residents a year

(Department of Transport and Main Roads, 2009) over the past two decades. If this trend continues,

the forecast is for the population to grow to approximately four million by 2026 (Department of

Transport and Main Roads, 2009). This is a significant increase and is estimated to generate five

million new trips within the transport network each day. The second reason for implementation of the

WBTN scheme is, therefore, the induced travel demand created by this population increase, and the

use of transport corridors as a solution to resulting road congestion. Noted is the fact that such

corridors produce urban amenities as well as urban disamenities2.

The initial identification of the WBTN corridors was undertaken nearly forty years ago and has

remained on the planning agenda for implementation. The public, to a large extent, has been aware of

these proposed corridors and in more recent times, much public discussion and debate have taken

2
Transport corridors can have negative as well as positive outcomes depending on the type of properties under
consideration. Commercial properties generally are found to exert positive effects whereas residential properties
generally exert a negative impact (Carey, 2001).

14
place on this issue (Department of Transport and Main Roads, 2009). It is generally accepted that the

projected population expansion will increase the need to upgrade and improve the existing transport

infrastructure. According to Queensland Transport Services (QTS) the growing population pressure

has led to a sharp increase in private vehicle use. Vehicular trips per day over the last two decades

have increased from 4.2 million in 1992 to 5.9 million in 2001. Furthermore, a rapid growth in freight

movements has been recorded (which is adding to the worsening peak hour traffic congestion), as

overcrowding of passenger transport services.

Table 2.1 shows the increase of Brisbane’s population compared to the other major cities in Australia.

Indicated is a continuous increase from 2001 to 2011. This is an important phenomena in which

commuter demand, and in particular the increase of private vehicle use in South East Queensland, is

likely to put pressure on the public transport system. Hence, the objectives of the WBTN based on

these population projections are worth revisiting and in particular the growth between 2001 and 2001

as set out below.

Table 2.1: Population growth from 2001 to 2011 in the Australian State and major Territory capital
cities (Australian Bureau of Statistics, 2006; 2011)
Major City 2001 2006 2011
Canberra 308 764 323 056 391 645
Sydney 3 948 015 4 119 190 4 391 674
Brisbane 1 608 820 1 763 131 2 065 996
Darwin 106 476 105 991 120 586
Melbourne 3 338 704 3 592 591 3 999 982
Adelaide 1 066 103 1 105 839 1 225 235
Hobart 190 161 200 525 211 656
Perth 1 325 392 1 445 078 1 728 867

15
The WBTN project involves twenty-two highway development options including improvements to

existing transport corridors. In this study, two of the proposed road corridors are considered in order to

examine their expected impact on property prices, namely Everton Park to Kedron and the Everton

Park to Albany Creek corridor options. Noted is the fact that while these infrastructure projects were

designed to tackle congestion problems, the negative impacts are also of importance in this study.

In particular the WBTN scheme requires land purchases for the widening and upgrading of existing

roads. Furthermore, the addition of new arterials and the development of new corridors will directly

affect the visual amenity of the contiguous suburbs or areas. Given the WBTN project covers a large

metropolitan spectrum, any changes to the existing infrastructure are, therefore, likely to affect the

decision-making of relevant property owners, as well as prospective buyers. It is these factors

affecting the decision making process of buyers and the prices they pay for properties which will be

considered in this study.

According to the South East Queensland Infrastructure Plan and Program (SEQIPP) (Department of

State Development and Infrastructure Planning, 2009), announcements regarding the implementation

of the WBTN were made in 2004. The first road corridor information flyers and evaluation sheets

were distributed in 2005-2006. It is expected, that the entire network of the proposed transport

infrastructure development will be completed by 2026 to cater to the expected population of 4 million.

Work on most of the corridor projects are yet to commence although the preliminary environmental

assessments has already been conducted. However the implementation process does not take into

transport related negative externalities other than the impact on green space in the affected areas.

16
The Integrated Transport Regional Plan (ITRP) which is implemented by the Department of State

Development and Infrastructure Planning has undertaken several surveys, information campaigns and

studies during the last few years targeting the WBTN project. They include mailed information

brochures, and survey forms which were posted to 735,000 households in the project area during the

period, 2008-2009. Twenty one thousand discussion papers were distributed and a toll free telephone

information hotline established during the public consultation period. The information provided has

increased the awareness of the proposed WBTN project and its effect among the general public. The

public’s views and comments were focused on transport improvements (they include, rail transit, bus

ways, bicycle and walking tracks) and the effect of the project on the environment (Department of

Transport and Main Roads, 2009). The consultation group of the Northern link program has

recognised the likelihood of a significant impact on neighbouring properties because of the

implementation of the transport network. The likely impacts that have been identified are air and noise

pollution. These impacts are recognised as having the capacity to affect property prices and have been

the subject of numerous discussions during key informant meetings with the relevant authorities.

Anecdotal evidence shows that houses affected by the WBTN project have been coming-up for sale

more frequently than those properties that are not in the proposed corridor areas. That the frequency

of houses coming up for sale in the affected areas tends to increase when major announcements

regarding the projects are made has been observed by local real estate agents and by visual

observations. However it is also evident that those properties offered for sale have longer selling times

in the affected areas than those that are not. Evidence for this is provided in Chapter Six. The selected

sample of sold properties in the thesis show that the most affected properties (within a 0 – 1 km range)

sell at a discounted rate of 32% of the value of all houses in the area. The thesis therefore examines the

effect of the level of information on buyers’ purchasing behaviour. Such observations has led to the

17
hypothesis that those property owners - and to some extent potential buyers - are aware of the

announcements regarding the proposed projects and are likely to have an effect on their valuation of

property prices (this issue is dealt with in Chapter Seven).

The literature on transport infrastructure improvements provides mixed evidence on the value of

contiguous properties. This is because of the range and mix of positive and negative externalities

resulting from proximity to transport infrastructure, as well as location, and type of infrastructure

development (Holl, 2004). As Holl points out, there are different impacts occurring at different

distances from new infrastructure improvement projects that could only be distinguished by a detailed

analysis of the particular geography. In his study, Holl uses aerial distance to the closest transport

infrastructure. A control group farther away from nearby households is used to examine these impacts.

It was found that new manufacturing plants were more likely to locate their factories near new

transport infrastructure facilities. Firms/companies located farther from these new facilities were likely

to experience negative impacts on completion of new transport infrastructure.

One of the objectives of this thesis is, therefore, to fill a research gap in the literature of the relevant

issues and to estimate the impact of announcements on proposed transport projects on property prices

using HP analysis. As mentioned in the introduction, this approach is well suited to address the

marginal effects of different factors affecting property prices.

According to the HP approach, property prices are described as the implicit prices of the bundle of

attributes that are responsible in determining their values. There are several categories of attributes

that are likely to affect property prices. This includes the distance to proposed transport corridors

which the literature indicates can generate considerable positive and negative impacts on commuters,

business owners as well as property owners, especially after the conclusion of these projects.

18
International studies provide evidence that improvements in transport infrastructure attract new

firms/companies to a particular area. However different transport alternatives are shown to confer

different spill-over effects on surrounding areas. For example, rail tracks, walkways and cycling tracks

generate different impacts when compared to the construction of highways. Therefore, it is important

to distinguish the individual impacts of each alternative in the proposed transport corridors.

Voith (1993) and Haughwout (1997) provided evidence that transport investments in central business

districts (CBD’s) attach positive externalities to suburban properties in the form of increased property

prices. According to a study conducted by Henneberry (1998), the effect of proximity to small rail

tracks (tram lines) and the variation of property prices show mixed results over time. In particular they

showed the mixed effects of establishing a future tram line and its impact on current property prices

over a period of eight years. The knowledge of residents about the proposed establishment of a

tramline created an inverse relationship between distance to the tram line and property prices.

Henneberry (1998) later observed a positive relationship and at the end of the selected time period

(1988 – 1996), and that there was no relationship with the proximity to the tram line and property

prices. This research supports the idea that property location and property prices are highly correlated.

The values are affected by the presence, efficiency and effectiveness of the transport mode. As a

general rule, investments in new transport schemes will change a location’s relative accessibility,

including both localised and overall land values. Chandra and Thompson (2000) studied the impact of

interstate highway investments on economic activity in non-metropolitan areas with a comparative

analysis of metropolitan areas. Attention was paid to the fact that investing in transport infrastructure

in non-metropolitan areas does not always contribute to the improvement of local economic activity.

While some industries were shown to grow as a result of reduced transportation costs, others shrank

19
on relocation. However, none of the above-mentioned studies have examined the impact of

announcements of proposed projects on property prices in the affected areas.

Residential development in the WBTN areas has grown significantly during the past five decades. The

increase in population, amongst other impacts, has also expanded the services sector such as health,

education and recreation in the region (Department of Transport and Main Roads, 2009). Therefore,

these changes require a detailed and organised transport infrastructure network. In turn creating such a

network affects the overall economy of the area, including the property market.

Ryan (1999) studied the effect of highways, heavy rail and light rail transit systems on property prices.

Ryan’s review of previous findings in the research area shows that when researchers use time as a

measure of access to transport facilities, it displays an inverse relationship. However, when distance is

used as a measure of access to transport facilities, it results in mixed property value levels. Giuliano

(1988) demonstrated the link between property prices and transportation facilities during the period

1950-1980 and how the property market fluctuates due to the presence of such facilities. Based on this

analysis, a marginal increase in accessibility associated with an interstate highway was shown to be

capable of influencing land use patterns. The marginal increase in accessibility of recently built

transportation facilities, however, was not strong enough to affect property prices and land use

patterns.

Baum-Snow and Kahn (2000) studied the outcome of US investments to reduce private vehicle

dependence on large public investments. They considered the effect of a rail transit on nearby housing

prices using distance as a proxy for access. It is concluded that there are fewer impacts on housing

prices based on five major highway improvements.

20
A study conducted by Kain and Quigley (1970) shows how housing prices tend to increase when

distance from the CBD increases. Wilkinson (1973) provides further confirmation of these results.

Damm et al. (1980) support Spengler’s (1968) argument that land values in developed areas do not

benefit significantly when new transit lines are introduced compared to an area that had not already

benefited from transit lines. In relation to the proposed WBTN scheme, most of the proposed corridors

are in their evaluation stage and only announcements of the proposed implementation have been made.

Therefore, it is considered important at this point of time to examine the impact of announcements of

the proposed projects on nearby property prices.

The information about the improvements in infrastructure of WBTN has been available to the general

public since 1996. In 2004, the selection of the transport corridors for the construction was completed

and official statements about the implementation were made in 2009. The identification of transport

corridors for this study about the WBTN was undertaken during the period, 1996-2008. Various

infrastructure improvement options were selected using these feasibility studies (Department of

Transport and Main Roads, 2009).

This chapter consists of six sections. Each section contains an explanation of different aspect of the

WBTN. Section one provides a detailed introduction to the WBTN scheme and in section two the new

road corridors included for further improvements are discussed. Sections three and four provide

information relating to the two corridors studied in this thesis. The general public’s understanding of

the WBTN is discussed in the section five. Section six discusses the effects of road corridor

improvements on surrounding property prices.

21
2.1 TRANSPORT CORRIDOR OPTIONS PROPOSED UNDER THE
WBTN SCHEME

As noted, plans to expand the existing transport network were first mooted approximately 40 years

ago. However, over the years, some of the original plans were changed and modified to take into

account the needs of a rapidly growing population and to meet the development needs of South East

Queensland. As envisaged in the WBTN proposal (Department of Transport and Main Roads, 2009),

the scheme proposes the construction of 22 transport improvement options of varying magnitudes (see

Figure 2.1).

22
Figure 2.1: Proposed transport corridors under the WBTN scheme (Department of Transport and
Main Roads, 2012).

23
2.2 NEW ROAD CORRIDORS UNDER WESTERN BRISBANE
TRANSPORT NETWORK

Figure 2.1 shows the location of the proposed transport corridors under the WBTN scheme. As

mentioned in the previous section, 22 proposed transport corridor options have been identified for

implementation and completed by 2026. Some of these projects have already commenced, but the two

corridors considered for this thesis, namely the Everton Park to Kedron and the Everton Park to

Albany Creek corridor options are yet to be initiated. Table 2.2 summarises the road corridor options

and identifies the impacts of planning authorities.

24
Table 2.2: Proposed transport corridors in WBTN scheme
Road Corridor Option
IPSWICH RAIL AND
CABOOLTURE RAIL
FERNY GROVE RAIL
NORTH WEST
TRANSPORT
CORRIDOR RAIL LINK
EVERTON PARK TO
ALBANY CREEK RAIL
CORRIDOR
Remarks
• Improvements are within the
existing corridor
• Provides short waiting times,
high frequency in even
headways, low transfer
penalties
• 42 kilometres in length
• Improvement of existing
corridors
• 14 kilometres in length
• High reliability due to
separate right-of-way
• In the long-term this option
provides radial link
connection between
Michelton and Brisbane CBD
• This operates between
Enoggera and Strathpine
using the preserved North
West Transport corridor
• This rail line operates within
the lines of Gold Coast,
Cleveland and Beenleigh
• Rail line will operate along
the Southpine road and Old
Northern road
• The rail line has two lines on
both sides
25
Impacts
• Reduces traffic in
Centenary Motorway and
Milton road
• Potential for increased
Park n’ Ride
• No environmental and
possible impacts of
externalities have been
considered
• Accommodates total
future demand within the
corridors given lower
cost per passenger
• High frequency at even
headways
• Has impacts on greater
Brisbane rail network
• No environmental risks
have been listed
• Utilises the whole
preserved network
• Cost per passenger is
comparatively high
• Full sectorisation of
Ferny Grove line from
the Gold Coast/
Beenleigh / Cleveland
group.
• Increased travel capacity
from northern suburbs
• Reduced private vehicle
dependence
• Extremely high cost.
• Not suitable for low
density population area.
 Road Corridor Option Remarks Impacts
KELVIN GROVE TO • Provides a rail link to • Increased inner city
EVERTON PARK RAIL CBD via Enoggera and CBD frame
CORRIDOR • Links to the Everton Park capacity
to Albany Creek rail line • High quality transport
• Brings passengers from route
Everton Park, Albany • Extremely high cost
Creek, Bridgeman • Capacity would
Downs, and McDowall to exceed future
the CBD expected demand
INDOOROOPILLY TO • This option would operate • Increased utilisation
DUTTON PARK RAIL as on-street or separate of cross river rail link
LINK right-of-way transport • Reduced private
route vehicle demand for
• Covers nodes of TransApex’s East-
Indooroopilly, Ipswich West link
rail line, University of • Very high
Queensland, Dutton Park construction cost
CROSS RIVER RAIL LINK • Increases cross river • Very high
transport capacity construction cost
• Creates new stations in • Competes with CBD
the Eastern side of the Metro and CBD Mass
CBD transport options
• Widespread urban •
renewal around the
stations
CBD MASS TRANSIT • Provides high frequency • Increased inner city
transport facility for the capacity and inner
CBD frame city distribution
• Connects important • Extremely high cost
commercial and • Crossing conflict
residential developments with existing inner
such as West End, UQ, city rail lines
QUT, South Brisbane,
Fortitude Valley with the
CBD

26
 Road Corridor Option Remarks Impacts
FERNY GROVE RAIL • An extension of Ferny • Provide a new Park ‘n’
EXTENSION Grove line to west of Ride station
Ferny Grove stations • Facilitates improved bus
• Allows metro style rail interchange facilities
operations in the long- • Topographical and
run Environmental
constraints
CBD METRO RAIL • A rail link between • Increased inner city and
South Brisbane and CBD capacity and inner
Everton Park city distribution
• An extension of Kelvin • Not suitable for low
Grove to Everton Park density population areas
rail link • Capacity exceeds total
future demand
KENMORE TO CBD • Operates as an on- • Improves the level of
RAIL LINK street or metro rail transport in the Moggil
extension along the Road and Coronation
Moggil road and Drive
Coronation drive • Provides an opportunity
• Connects inner North to promote urban centres
Western suburbs with like Taringa,
the CBD Indooroopilly and
Toowong
• Short waiting times and
passengers experience
low transfer penalties
INDOOROOPILLY TO • An extension of exiting • Increased capacity from
DUTTON PARK BUS LINK Eastern Busway at outer western suburbs to
Dutton Park to Western the CBD
Freeway • Increase east-west travel
• Key nodes of UQ and by-passing the CBD
Indooroopilly are • Alignment around the
accommodated UQ need agreements
• Can operate as on-
street or separate right-
of-way transport link

27
 Road Corridor Option Remarks
KENMORE TO CBD • Will operate along the
BUS CORRIDOR Coronation Drive and
Mogill Road
• Connects outer-western
suburbs to the CBD
DARRA TO TOOWONG • A separate right-of-way
BUS CORRIDOR busway or separate transit
lane along the Centenary
Motorway from Ipswich
Motorway to Toowong
Roundabout
• Provides high speed
transit option for south-
western suburbs
KEDRON TO BRACKEN • Operates from Royal
RIDGE (NORTHERN Children’s Hospital to
BUSWAY) Bracken Ridge along
Lutwyche and Gympie
road.
• Includes dedicated
busway.
KELVIN GROVE TO • Can be separate right-of-
EVERTON PARK BUS way transport route or
CORRIDOR operate on-street along the
Kelvin Grove road
• Connects Enoggera and
outer north-western
suburbs of Albany Creek
to Brisbane CBD
KELVIN GROVE TO • Links Ashgrove to Inner
ASHGROVE BUS Northern Busway by an
CORRIDOR on-street bus lanes along
the Musgrave road
• Increases capacity to
Brisbane CBD from The
Gap area.
28
Impacts
• Significantly increases
the level of service
• Opportunities for urban
renewal in centres which
include Indooroopilly,
Toowong and Taringa
• Improves the level of
service and reliability of
bus service along the
Centenary Motorway
• Reduced car travel
demand in Centenary
Motorway
• Competes with
alternative routes such as
Northern link concept.
• Increases the constraint
along the Gympie road
• Reduced car travel
demand
• Increased capacity from
outer north-western
suburbs of Albany Creek
to Enoggera and
Brisbane CBD
• Topographically
constrained option
• Competes with other
options providing
transport to the CBD
capacity
• Reduced private vehicle
dependence.
• Topographical
constraints for
implementation
 Road Corridor Option Remarks
NORTH WEST • Functions as a separate
TRANSPORT CORRIDOR right-of-way high quality
BUS LINK bus lane
• Runs parallel to the road
corridor designed in 1970
to link Stafford road and
Gympie arterial
• Connects regional and
district centres in north of
the city to CBD
EVERTON PARK TO • Provides improved cross
KEDRON BUS LINK town bus services to
Australia Trade Coast
covering the nodes of
Kedron and Northgate
• Provides new east-west
link by avoiding Brisbane
CBD
TRANSAPEX NOTHERN • Runs between Toowong
LINK roundabout and Inner
City Bypass in Red Hill
• A connection to Inner
Northern Busway at
eastern portal could
increase express bus
services to Brisbane CBD
EVERTON PARK TO • Could operate as a
ALBANY CREEK separate right-of-way
OPTION transport lane or operate
on-street with additional
lanes existing in Old
Northern road
• Could increase frequency
of the proposed bus
transport from Kelvin
Grove to north-west
suburbs
Importantly the media (TV, radio, and newspapers) have given considerable publicity to the proposed
WBTN corridor options shown in Table 2.2. As a result, communities in the affected suburbs have
29
Impacts
• Travel time advantages in
comparison to car operating
in mixed traffic
• Short waiting times and low
transfer penalties
• Competes with Caboolture
rail line and Northern
Busway
• Reduced car travel demand
on Stafford road and Airport
link
• Travel time advantages
• Complexities associated
with access to Kedron and
Mitchelton
• Serves only for long
distance express routes
• Provides high capacity
connection to Inner
Northern Busway
• Reduced car travel demand
• Engineering constraints at
the Southpine road
• Competes with North West
Transport Corridor
protested and campaigned against some of the proposed projects (for example, Brisbane Times, 2008;

Western Brisbane Bypass Action Group, 2008). Section 2.6 discusses this aspect in detail.

As mentioned in the introduction, the main focus in this thesis is to examine the impact of

announcements of proposed expansions of existing road corridors on nearby property prices. The two

corridor options selected for study are the Everton Park to Kedron (Section 2.3) and the Everton Park

to Albany Creek (Section 2.4) corridors. The Everton Park to Kedron project is designed to develop

the existing road corridor into a transport corridor consisting of a single busway and a lane for cycling

and walking. The Everton Park to Albany Creek corridor aims to create more lanes for public

transport, while also providing rail tracks alongside the Old Northern Road. Since these two projects

are distinguishable by size, it is possible to examine the marginal value impacts generated by the

expansion of these two corridors. The Everton Park to Albany Creek corridor, which includes new rail

lines and new lanes for public transport, is large in comparison to the Everton Park to Kedron project

which adds only one busway and a cycling and walking lane, with an underground tunnel for bus

transport (reducing the need for surface expansion). Hence, it is hypothesised that the effect of the

Everton Park to Albany Creek corridor on the surrounding properties is higher than that of the Everton

Park to Kedron corridor. Given the land resumptions and expected externality impacts are higher

under the Everton Park to Albany Creek, the analysis is based on differentiating the magnitude of the

impacts of these two options.

The selection of corridors for this thesis was based on the number of suburbs affected in the area (see,

questionnaires in Appendix 1.0 & 1.1) and the magnitude of expansion, one with larger impacts and

the other with smaller impacts. This selection further supports an important assumption of HP method

which is that properties should be selected from same submarket. Since EPK and EPAC are

geographically in the same area, we assume that corridors are in the same submarket while paying
30
attention to the single houses to strengthen the assumption of the submarket. The two corridors

selected for the study are discussed in detail in Sections 2.3, 2.4 and in Chapter Six.

2.3 THE EVERTON PARK TO KEDRON ROAD CORRIDOR

This proposed four kilometre long corridor improvement is coupled with the arterial upgrade and the

inclusion of an additional motorway link. Reducing congestion and providing additional space for

cycling and walking is the basic aim of this project. It is hoped that the project will reduce over-

crowding on passenger transport services, as well as reduce peak hour congestion and freight

movement costs.

Community feedback (Department of Transport and Main Roads, 2009), was undertaken for this

option covering the entry and exit points of corridors, alignment and preferred mode of transport. The

development of the existing four lane (two left and two right) road from Everton Park to Kedron

includes its expansion to accommodate one bus lane, a cycling lane and walkway. This expansion

directly affects six suburbs. They are Everton Park, Stafford, Alderley, Grange, Gordon Park and

Stafford Heights. The aim of these changes is to improve transport by reducing travel time. This

corridor will also provide public transport facilities from the Western suburbs to the Northern busway

from the West and will add a new arterial with a bus lane and a new tunnel road under the existing

Stafford Road that links the North-West Transport Corridor and the Airport Link. The corridor’s 4

kilometre length runs adjacent to Stafford road. The average housing density in the area is 845 per

square kilometre.

31
 Figure 2.2: Map showing Stafford Road (in dark red) and its immediate environs (Google Maps, 2013).

32
In all the above mentioned suburbs there are many residential properties likely to be affected by the

implementation of the road corridor. Judging from the volume of information provided to the public

the visual, environmental, air and noise pollution impacts of the corridor are well known indicating

that property prices could be affected by the presence of negative externalities.

2.4 THE EVERTON PARK TO ALBANY CREEK BUS AND RAIL

CORRIDORS

This proposed scheme aims to add one rail line adjacent to the Old Northern Road, and to expand the

existing road corridors. Community feedback (Department of Transport and Main Roads, 2009) was

undertaken for this option. The main objectives of the scheme are aimed at reducing travel time NS

traffic density and thereby making transit more attractive. The suburbs included in this development

plan are Everton Park, Albany Creek, Everton Hills and McDowall. The aim of the corridor

improvements is to facilitate bus and rail transport by adding a new rail link and appending new lanes

to the existing road corridors. The visual, environmental, noise and air pollution impacts on nearby

properties of the four affected suburbs are expected to be greater when compared to the Everton Park

to Kedron option where the corridor expansion is smaller. This corridor improvement will provide a

transport link to connect the North Western suburbs to Enoggera Road with the aim to reduce

dependence on private vehicles. The length of this transport corridor is 9 kilometres and is contiguous

to the Southpine road and the Old Northern roads. The average housing density in the area is 560

houses per square kilometre.

33
Figure 2.3: Map showing Old Northern Road (in red) and its immediate environs (Google Maps, 2013).

34
2.5 THE GENERAL PUBLIC’S UNDERSTANDING OF THE ROAD
CORRIDORS

Community consultation provided feedback on each of the 22 transport options. The views of those

who are likely to benefit, as well as communities living close to the proposed corridors, were taken

into account. Community display panels, information sheets, website updates and advertising,

provided information of the proposed improvements. The Queensland Department of Transport and

Main Roads reported that approximately 3000 people visited the ten public displays with around 500

contact forms completed (see, Department of Transport and Main Roads, 2009).

In addition, there were 180 calls to the hotline number established by the Queensland Department of

Transport and Main Roads, 380 emails and 9500 website visits. Nearly 400 surveys and printed

feedback forms were completed (Department of Transport and Main Roads, 2009). Relevant

government departments and NGOs undertook surveys on the social and environmental impacts of the

project. Furthermore, community groups worked closely with the WBTN project planners

(Department of Transport and Main Roads, 2009). Several of the 22 transport options were either

curtailed or totally withdrawn following community consultation and receipt of expert opinion. For

example, during the investigation of the Brisbane Valley Bypass, residents in the affected suburbs

such as Samford, The Gap, Bellbowrie and Moggill highlighted the potential impacts on the

environment and local amenities. Strong public opposition to this proposed bypass (see Figure 2.1)

was voiced concerning the likely negative impacts on the natural environment and the resultant threat

to the semi-rural lifestyle of these areas. This led to its withdrawal from preliminary assessment and

underlined the value the public put on public place in urban amenities.

35
The community perception about the space, land resumption and environmental impact were assessed

using a 1 to 5 scale. In this 1 represented highly beneficial scenario while 5 represented highly

negative scenario. People located around of the corridors showed a negative community perception

towards the land resumption and environmental impacts. Table 2.3 summarises the community

perceptions related to WBTN expansions in the selected corridors.

Table 2.3: Community perception of EPK and EPAC

Community Perception EPK EPAC

Space and Land Resumption 4 4

Environmental Impact 3 4

2.6 THE EFFECT OF WBTN ON SURROUNDING PROPERTY

PRICES: AN ECONOMIC PERSPECTIVE

The significance and the benefits/costs of the WBTN are highlighted by various stakeholders in the

relevant literature. The available literature and projections, as pointed out earlier, predict that the

population of the city of Brisbane will increase to around four million by 2026. This provides a clear

approximation of the demand and supply interactions for the existing property market, given the

demand for properties is expected to increase with the rise in population.

Because of externalities such as air and noise pollution and visual dis-amenity of the proposed

transport network, there will be changes to property prices resulting from the announcements of the

proposed projects. This creates a segmentation of the property market in terms of their prices and

geography. Specifically it is hypothesised that announcements of the proposed corridors, depending on

36
the extent of their expansion, will affect local property markets. These effects will also influence the

nature of property cycles which capture the logical sequence of recurrent events such as variation in

property prices, properties coming up for sale, rental market and demand. In such a scenario, the

stigmatised properties affected by the expansion of road corridors are likely to have a larger variation

in prices during economic downturns compared to prices during an economic boom.

Since any increase in population generally brings positive benefits to a locality (e.g. increasing

employment opportunities and public service facilities) the demand for real estate property will also be

influenced. Definitionally, the market for real estate is formed by the interaction of individuals

exchanging real property rights for other assets such as money (Wilkinson et al., 2008). As population

increases, the circulation of wealth is likely to create new employment opportunities, which will in

turn increase the demand for houses. In this thesis, we use the market price of properties as a yardstick

of measurement, which we assume to be efficient. Hence, the market price is defined as the “estimated

amount for which a property should exchange on the date of valuation between a willing buyer and a

willing seller in an arm’s-length transaction, after proper marketing, wherein the parties had each acted

knowledgeably, prudently, and without compulsion” (International Valuation Standards Committee,

2011).

Given the construction of the transport network involves the acquisition and establishment of

reservation land near proposed transport corridors, such actions are likely to generate a ‘disturbance’

in which property owners are likely to suffer losses. Using the HP method it is possible to measure the

impact. As Wilkinson et al. (2007) have shown, the effect can be an increase or a decrease in the value

of properties.

37
The value of a property is determined by factors such as utility, scarcity, desire and effective

purchasing power, but it should be noted that any market shock could alter these factors. Therefore, it

is useful to estimate the magnitude of these effects in a market-based approach. Spill-over effects that

are noise, air pollution and vibration are likely to change the utility derived from properties close to

transport corridors depending on the perceived levels of noise, air pollution, environmental and visual

impacts.

It is also clear that the availability of usable land will be reduced due to the expansion of the road

corridors in the affected areas. It increases the scarcity of desirable land and demand for it. These

conditions are relevant to the factors which influence real property prices (for examples, social trends,

economic circumstances, governmental controls, regulations and environmental conditions).

The decision making of buyers and sellers is equally likely to affect the real estate market in the

project area once the proposed corridor network is announced. Hence, uncertainty regarding the

possible impacts of the proposed corridor project affects the decision-making of would-be buyers,

current owners (sellers) and to some extent, real estate agents in the affected areas. In this thesis, the

objective is to measure what impact the announcement of these proposed projects has on property

prices. For this purpose, the distance from the proposed transport corridors to properties (houses) is

taken into account, while also considering other determinants of property prices.

In the literature (Ong and Koh, 2000), time on market (TOM) and the list price of properties show a

relationship. The TOM significantly depends on the price and age of the property. The available

evidence shows that newer houses (those in medium to high price ranges) remain in the market for a

shorter time period. However, the size of the house does not have a significant effect on the number of

days a property remains on the market (Kang and Gardner, 1989). It has been noted that above market
38
prices and below market prices have significant impacts on the saleability of a property (Ong and Koh,

2000). It is thus hypothesised that prices of properties near proposed corridors are likely to be offered

for sale at below market prices due to the project announcements. This is due to the perceived negative

impacts which become a factor in the interaction between informed buyers and sellers before the

transaction is made. Project announcements not only have a potential to bring about a fall in prices,

but also to lengthen the time a property remains unsold in the market due to perceived negative spill-

over effects. These factors, it is hypothesised, will also increase the transaction costs of selling a

property in the affected areas.

It is assumed a rational buyer will consider the future possible impacts (negative and positive) of

transport corridors. This is related to first mover disadvantages and compensation issues (Sirmans et

al., 1997). According to Sirmans et al. (1997), the first consumers who purchase housing in a newly

affected area subject to an environmental or transport externality, must confront the housing

consumption risk arising from neighbourhood externalities that are uncertain at the time that their

housing decision is made. Thus uncertainties created by future neighbourhood developments will

place the housing market in an indecisive state for both buyers and sellers.

2.7 CHAPTER SUMMARY

According to the discussion in this chapter it is found that the impact of the existing corridors - and in

particular the impact of the proposed WBTN corridor - on nearby property prices has not been taken

into account in assessing property prices by the WBTN project proponent. However, it is quite clear

that large projects of this nature are bound to result in externalities, both positive and negative,

depending on the nature and the timing of the impact. As evident from previous studies, transport

infrastructure improvements of this nature have resulted in price discounts on nearby property prices
39
(Palmquist, 1992). However, importantly no study, except that of Neelawala et al. (2013) has been

undertaken to date to demonstrate the impact of proposed large projects on property prices. Two

transport corridors have been selected out of the 22 proposed transport corridor options under the

WBTN scheme for analysis in this study and within these two corridors it is found that nine suburbs

will be affected by the construction of the proposed transport corridors. The thesis examines whether

or not the existing and the proposed transport corridors have an impact on property prices of these

affected suburbs. Chapter Three undertakes a detailed literature review of the relevant issues.

40
CHAPTER THREE

EXAMINATION OF HEDONIC PROPERTY PRICE ANALYSIS

AND THE ISSUE OF ASYMMETRIC INFORMATION IN
RELATION TO WBTN
3.0 INTRODUCTION

This study involves a property price analysis using the HP method widely used in environmental

valuation studies to estimate the effect of negative or positive externalities. This method allows the

researcher to investigate the various factors that govern the property price and the marginal effects

(implicit prices) of each component affecting the property price. In carrying out this research a

comparison is made of the different outcomes of the road corridor expansion with respect to the

selected study sites. It is hypothesised that the magnitude of the expansion of road corridors has a

significant impact on the level of the negative externality generated. It is therefore intended to

calculate the implicit prices of the study site and then to calculate the welfare effect through a control

site analysis (with and without effect). This chapter addresses the research objectives one and two

outlined in Chapter One and the research questions one, two, three, and four which are also stated in

Chapter One.

According to the WBTN Strategy Report (2009) the main objective of the WBTN road corridor

development is to provide sufficient facilities for public transport and to reduce private vehicle use.

However the way in which these objectives are to be operationalised through expanding the existing

road corridors and adding new transport lanes create negative externalities. Hence affected parties

close to the transport corridors bear an extra cost due to these negative externalities and in particular

increased noise and air pollution. This thesis investigates these issues related to the WBTN strategy
41
with the aim of calculating the welfare losses of the affected parties. This chapter sets out suggested

policy outcomes designed to correct (internalise) the negative externalities which can arise from the

proposed corridor expansions.

This chapter consists of seven sections. The overall objective of providing a detailed explanation of

the hedonic theory and econometrics is captured in each section. In the introduction a general

overview in relation to the importance of the hedonic method in analysing the effects of the WBTN

scheme is set out. Section one discusses the existing literature on the impacts resulting from road

corridors and transport related externalities on property prices. Section two examines the literature on

spatial effects on property prices. Sections three and four provide a discussion of the HP before and

after models and the HP functional forms respectively. The efficiency of using HP method to calculate

damage cost is addressed in Section five. A relationship between Akerlof’s lemon model and the HP

method is explored in Section six. Section seven summarises the overall findings.

3.1 SOURCES OF EXTERNALITIES THAT AFFECT PROPERTY

PRICES

3.1.1 NOISE AND PROPERTY PRICES

The intensity of noise impacts has a non-linear relationship with distance from its source (Nelson,

1982). When the distance increases from the source, the level of noise decreases in a non-linear

manner. According to previous studies (Kutz, 2008; Pope, 2008) the occurrence of noise pollution is

negatively linked with property prices and is frequently observed in the vicinity of airports, rail transits

and highways, large industrial plants and manufacturing sites. In most countries, especially in

developed countries, a decibel level of 50 is the maximum level for residential areas (Berglund, 1999).

If the maximum decibel level is exceeded, it is considered a negative externality to the surrounding

42
area. These negative effects are reflected in property prices through the impact on the area’s serenity

and the significant contribution to stress levels (Berglund, 1999; Korfali and Massoud, 2003). In

extreme situations, noise can affect residents’ conversations, TV viewings, leisure, work or sleep and,

in some cases, can generate harmful long-term health effects adversely affecting the productivity and

quality of life (Nelson, 2007).

Uyeno et al. (1993) studied the relationship between noise pollution and property devaluation. The

different noise levels used for Uyeno’s study were: Noise Exposure Forecast (NEF) and standard noise

measurements in North America. The study used a NEF value of <25dB for control, since 25dB falls

within the accepted range. Property price fluctuations observed were between the ranges of 25dB –

40dB. Two different sites in close proximity to the Vancouver airport were selected. Care was taken

to identify the differentiated nature the property markets which arose from different types of properties

- specifically detached houses, residential condominiums and vacant land. The property devaluations

were 0.65 per cent, 0.90 and 1.6 per cent respectively for each submarket underlining the importance

of these differentiations in the estimation of the effects of dis-amenities.

The literature indicates the impact of noise can influence the welfare of residents if it exceeds an

ambient level of 50 decibels (Berglund, 1999) with the welfare changes to residents calculated by

price differences between affected and non-affected properties. To recoup the unaffected utility

derived by the attributes of housing quality (that is prior to any announcement of the implementation

of transport corridors), property owners in the affected area need some form of compensation. This

aspect is discussed in Chapter Eight under policy implications.

Some studies have analysed noise levels in a different context. Fidell (2003) focussed on the level of

noise-induced annoyance. Many current studies assess the impacts of transport-related noise on
43
communities using the purely descriptive dosage-effect relationship introduced by Schultz (1978).

Schultz’s summarised the previous findings of community level noise effects producing a time-

weighted average of noise exposure as a primary indicator of community reaction to noise. Graphed

annoyance levels vs. noise ratings (percentage complaints vs. outdoor sound level) are used to

approximately depict the relationship between noise and property prices. In the study Schultz used

different sources of noise - such as those originating from aircraft, highways and railways.

Importantly, the United States Federal Committee on Noise used the results of Schultz’s study for

policy formulation regarding communities’ reactions to transport related noise.

Studies show that houses situated in the vicinity of an airport will experience a greater impact from

noise annoyance. In a meta-analysis of twenty three HP studies covering Canadian airports, Nelson

(2004) using different model specifications and benefit transfer methods to analyse noise effects on

communities, showed that noise levels had measurable adverse impacts on adjacent property prices.

From his meta-analysis Nelson (2004) used the HP method to estimate MWTP for decreased levels of

noise intensities. This was corrected for heteroskedasticity using weighted least squares. The key

conclusion of this study was that the property prices reflected a 0.5-0.6 per cent noise-related

depreciation.

Railroad noise is known to have a considerable impact on property prices in a similar way to airport

noise, but has characteristics which differ with respect to road traffic noise. The main side effects of

rail transport are vibration and noise and the impact of vibration on structural quality of houses in the

close proximity to rail tracks. Strand and Vågnes (2001) studied the negative impacts of rail noise on

nearby properties using the HP method and a multi-attribute utility investigation based on real estate

data. The characteristics of houses were evaluated using distance to the rail track as a proxy for impact

44
levels. Using a dummy variable to distinguish between single and multifamily dwellings, the

robustness of the analysis was increased. The analysis showed that when distance to the rail line is

increased, property prices are correspondingly increased. This approach is used in this thesis to

differentiate the effects of the two transport corridors.

Strand and Vågnes (2001) also conducted a multi-criteria analysis using the expert views of real estate

agents and in which the effects of announcements of inclusion of road corridors and rail tracks on the

property price and on surrounding communities were examined. As in the case of numerous HP

studies, prices of properties most affected by noise pollution were found to be those located within the

first hundred meters from the rail track. Once these households were removed, the significance of the

analysis became weak. In both the Strand and Vågnes analyses it was found that there was a linear

relationship with distance to rail track, especially within the first hundred meters. In a similar manner

Rodríguez and Mojica (2009) found that road corridor expansion can creates different segments of the

market such as affected and non-affected areas. Using a similar methodology this thesis measures the

effects of proposed rail tracks and road corridors in the Everton Park to Albany Creek Road corridor

option along Old Northern Road. The empirical results in Chapter Six show a significant negative

impact which can result from announcements made about road corridor expansions. The control site

analysis further supports this phenomenon.

For policy decision-making at the regional level, the valuation of noise effects is an important method

of measuring social benefits or losses. For the purpose of measuring noise levels as a dis-utility in

terms of the living comfort of communities, various valuation techniques have been used in the studies

conducted to date. The most commonly applied technique in environmental valuation in this context is

the Revealed Preference (RP) method. In recent times, other valuation techniques such as Stated

45
Preference (SP) methods have been used. In the RP method, the most widely applied technique is the

HP method which has been successful in establishing the implicit price imposed on property prices.

Navrud (2002) discussed the economic valuation of noise in a report to the European Commission,

tasked with setting up new standards for noise levels. Nelson (2004) also estimated the willingness to

pay for noise reductions using the HP method. In this study it was shown that noise dis-utility

generated a number of costs to the affected parties including opportunity costs and dis-utility

(intangible costs). Resource costs were associated with health services, medical insurance and other

health related expenditures. Opportunity costs included loss of productivity (work time lost) and lost

leisure time. Dis-utility costs included inconvenience or restrictions imposed on the preferred level of

leisure activities. The study conducted by Navrud used a damage function and cost of illness approach

to measure the impacts of noise. It was acknowledged that the setting up of a common standard for

the purpose of mitigating noise annoyance would be difficult given that individual level thresholds for

noise tolerance was highly subjective.

Other studies dealing with noise dis-amenities and the subsequent impacts on property prices have

been conducted which focus on the socially acceptable level of noise and possible ways of attenuating

the intensity of noise impacts on the quality of life. In this thesis subjective measures of satisfaction

for various amenities are controlled for by means of data from the questionnaire. This data revealed

that 74% of respondents perceived a medium to high level of noise pollution in the vicinity of the

transport corridors. The distance variable in the satisfaction model used indirectly captures the effect

of noise disutility along with other transport related dis-amenities. This is discussed in Chapter Seven.

Using empirical studies conducted on airport and road traffic noise, Nelson (2007) observed that the

right to use these resources was likely to be categorised as common property resources. For example,

46
airport operators and passengers are entitled to use designated space for the purpose of airline services

and freight control. Surrounding neighbourhoods are consequently required to value the environment

around them according to proximity to these facilities. Nelson (2007) showed that revealed preference

methods assume there are private markets that are complementary to noise avoidance, including the

market for residential properties. It is hypothesised that noisy areas are favoured by individuals who

have a low MWTP for reduced noise levels and the opposite for those with a higher MWTP. This

intuition is the basis for the policy decision making discussion in Chapter Eight. In this chapter

compensation procedures to lift the utility level to the initial level are discussed.

Airport noise pollution studies have been used widely to indicate the depreciation of property prices.

Drawing on these, the European Commission proposed to ban from 1990, the inclusion in European

airline fleets aircraft which received its acoustic certificate before 1977. In the light of this proposal

Pennington et al. (1990) estimated property devaluations with respect to Manchester airport noise

levels using one of the largest data sets used in airport noise pollution studies. HP valuations were

derived from housing mortgage data and noise contour maps of Manchester International Airport.

Pennington et al. (1990) examined the location and environmental factors which have a significant

influence on property prices. It was found that only a low negative, non-robust relationship between

aircraft noise and property prices existed. Pennington et al. distinguished between properties using the

number of bedrooms or living rooms as dummy variables. The age variable in the study was

standardised at values of 25, 30 and 50 years (a similar approach is adopted for the empirical analysis

in Chapter Six). Age was also linked to the ‘other’ attributes of properties, such as the number of

bedrooms, location and factors not captured in other variables. In the calculation of taxes based on the

rental value of the property, considerable weight was given to age and maintenance costs with older

47
properties being assessed at lower rate burdens. Pennington et al. concluded that there is a negative

relationship between airport noise and property prices. However, when neighbourhood and location

characteristics are taken into account the relationship becomes statistically insignificant. Pennington et

al. further argue that even without the presence of airport noise pollution these differences can be

observed when compared with properties having similar characteristics. This assumption is used for

the control site analysis in this thesis (see Chapter Six) and in which significant differences in welfare

effects between affected and non-affected properties are observed.

Collins and Evans (1994) re-analysed the study conducted by Pennington et al. (1990) of Manchester

airport noise using the Artificial Neural Network (ANN) method. This methodology has been shown

to be highly effective in identifying different patterns in the distribution of households with respect to

different characteristics. Separating the noise effects from neighbourhood characteristics was an

important outcome of this investigation which was not adequately dealt with by Pennington et al.

(1990). The ANN method was able to distinguish between neighbourhood effects and noise impacts

even when there was a high level of complexity in household characteristics. They concluded that,

detached houses are more sensitive to airport noise compared to semi-detached or terraced houses. The

magnitudes of the effects were found to be in the order of a 4–6 per cent reduction in prices for semi-

detached and terraced houses compared to an 8–10 per cent reduction in prices for detached houses.

Some studies (Nelson, 1982) have concentrated on the relationship between highway noise and

property prices. This is illustrated in Figure 3.1 where home buyers are shown to move from noisy to

quieter areas and thereby changing the demand schedule in both categories. A similar buyer behaviour

can be observed in this study where it is discussed in the satisfaction model in Chapter Seven. The

48
reflected noise-price gradient for such a movement is depicted in Figure 3.1. It is assumed that when

the distance is doubled, the noise generated from a highway is decreased by three to six decibels.

Figure 3.1: Property price variation with the distance from the noise source (Nelson, 1982).

In relation to examining the impact of externalities, three basic assumptions are made in HP valuation.

They are:

1. Residents are free to move from one location to another to increase their utility.

2. Noise levels should not be common in all areas, but should be a localised negative externality.

3. Noise must be a quantifiable public hazard which should be clearly identified. In other words, the

noise variable should be able to stand alone amongst other characteristics in the HP method when

determining the implicit prices.

49
Thus it is assumed that once the noise levels are reduced in particular adjacent area, residents of the

affected households would be willing to move to that area if transaction costs are negligible. Hence,

the increase in demand for housing in quieter areas increases the price of such properties.

The third assumption can be described as a form of MWTP for increased quietude for consumers,

which is capitalised into property prices. That is, property owners who seek reduced noise levels tend

to bid for higher prices. However, this bidding and choice of new properties are not without cost. It is

assumed that noise is not an ubiquitous environmental externality but a localised one and the impacts

on households can be clearly recognised. It is also noted that usually the intensity of sound is

measured in decibels which are on a logarithmic scale (Davis & Patronis, 2006). Moreover the

intensity differs with respect to the time of day and to the psychological sensitivity to noise (Berglund,

1999).

3.3.2 AIR POLLUTION AND PROPERTY PRICES

Air pollution is one of the major “environmental bads” produced by transport corridors. Air pollution

is directly linked to health effects arising from suspended particulate matter and noxious gases

(Brunekreef et al., 1997). Hence, it is a requirement in environmental valuation to consider the

marginal effects of air pollution related to the expansion of transport corridors. HP analysis uses

property prices as a proxy for capturing the discount effect passed on to prices as an aggregate value,

combining the implicit price of noise, air pollution discount and a possible dis-amenity discount. In

this section the literature on the discount effects of air pollution, as reflected on property prices in

relation to air pollution, are discussed.

Brookshire et al. (1982) explained the value of air pollution impacts - as measured by the scenic vista

estimation - using survey data and the HP method. Theoretically MWTP values obtained using the HP
50
methods are more extensive than those obtained from survey methods. In a general scenario common

to the Western United States, coal fired plants negatively impact on air quality and visibility, which

are estimated, using declines in local visibility. For this purpose, the construction of socially optimal

decisions on abatement should be based on complete information about values placed on site visibility.

Studies revealing the impact of air pollution are therefore essential for such policy formulation and

have been instrumental in the imposition of California Emission Standards which in turn led to new

technological innovation in reducing motor vehicle emissions. In carrying out this study Brookshire et

al. underlined the importance of a well-established property market to undertake HP analysis.

Palmquist (1984) used environmental pollution as a means of identifying differences in the housing

market. In the study Palmquist used values of total suspended particulate matter (TSP) provided by

data for each state studied in United States (USA). It was found that TSP levels are linked to pollutant

levels but were negatively related to house prices in all states surveyed.

Studies by Polinsky and Shavell (1975), Freeman (1971) and Ridker and Henning (1967) show that

generalisation of air pollution estimates are viable only if the considered area is small and if

unrestricted house purchase are possible. They concluded that the values estimated by the HP model

should, therefore, be interpreted under ceteris-paribus conditions and expressed in terms of the

difference in prices of two properties given that the level of air pollution does not change in the area

under study. Polinsky and Shavell (1975) further suggested that if the considered area is not small and

if ‘free’ market transactions are not possible, a general equilibrium model should be applied to capture

the indirect effects of air pollution levels from other areas.

In a discussion paper on air pollution and property price variation, Small (1977) provided a number of

criticisms on Freeman’s (1971) conclusions. He noted that even though there are estimation limitations
51
regarding the hypotheses around the HP model, coefficients derived for air pollution can still be used

for cost benefit analysis and compensation purposes. Small further asserted that in interpreting air

pollution levels, it is fair to assume that there are large numbers of utility maximising individuals

facing a fixed housing supply in short-run equilibrium. This assumption allows individuals to choose

households regardless of different air pollution levels within a small range, independent of other

housing characteristics. Thus even if the correct functional form is applied, the estimation results are

not suitable for predictions of large changes in these levels. Instead, it can predict only variations of

property prices relevant to small changes in pollution levels.

Environmental regulations relating to air pollution place a significant impact on the non-market dis-

amenity created by them. Chay and Greenstone (2005) studied the non- attainment3 status of TSP

levels and property prices across different states in USA. The US clean air act requires industrial

polluters in every state to achieve a certain minimum standard of emission levels (attainments). Chay

and Greenstone tested the relationship between TSP non-attainment status and housing prices. They

found that the elasticity of housing prices varied between -0.20 to -0.35 when the TSP non-attainment

status was used as an instrumental variable. Estimates of the elasticity of housing prices in response to

TSP levels were loosely linked to the model specification when compared with cross-sectional and

fixed-effects estimates. In comparison to the Clean Air Act Amendment (CAAA), positive changes are

reflected in the TSP non-attainment status. Since TSP non-attainment status represents exceeding TSP

levels above desired ceiling standards, CAAA puts greater pressure on those states to reduce TSP

3
If a county’s or state’s pollution levels exceed the Federal ceiling, then the Environmental Protection Agency (EPA)
labels the county or state as “non-attainment”.

52
levels rapidly compared to the attainment counties. The attainment status is then positively related to

the house prices in relation to CAAA.

Chay and Greenstone (2005) have further described the impact of pollution on property prices using

meta-analysis of air pollution studies conducted during last 30 years. They found a weak cross-

sectional correlation between house prices and particulate pollution. In 37 cross-sectional studies they

showed that a 1µg/m3 fall in TSPs results in a 0.05-0.10 % increase in property prices, which

corresponds to a 0.04 – 0.07elasticity. This is consistent with the findings of Ridker and Henning

(1967).

Murthy et al. (2003) used the HP method to estimate the MWTP for air quality improvement in

Kolkata and Delhi, India. In a survey of 1,250 households in each city residents were shown to be

willing to pay for the improvements. In doing so Murthy et al. (2003) provided supportive evidence

for the issues raised by Fietelson et al. (1996) regarding the two stage estimation process of the HP

method. Murthy questioned the second stage demand estimation (MWTP) procedure using implicit

prices, pointing to identification problems relating to the fact that the quantity and implicit prices of

the characteristics were endogenous in the HP model. A further problem identified by Murthy and

Fietelson et al. is that MWTP is shown not to be a direct estimate since it is calculated from the

implicit price of the HP model. It is also argued that the uncompensated bid functions of individuals

are a function of income and quantity of the characteristics. Thus if two individuals choose different

quantities, it must be due to income (a change in demand). Hence, income is correlated with the

quantity of other characteristics. Therefore, to overcome this identification problem, segmented

markets should be selected. In this way, income effects could be ignored and within this single market

preferences and incomes can be assumed to be identical.

53
The relationship between hedonic price and the quantity of a particular characteristic is illustrated as

follows.

Prices ($)
ℎ( )

Figure 3.2: Hedonic price variation of attributes with quantity (Gunatilake, 2003).

According to Figure 3.2, the variation of the price of a particular characteristic shows a non-linear

relationship increasing at a decreasing rate. Hence, the price of a characteristic increases to a certain

point and then tends to reach a plateau or even decline when the quantity of the characteristic is

increased. This intuition is applied in interpreting the regression results of this study.

3.2 SPATIAL EFFECTS

Clearly spatial effects can have detrimental or beneficial outcomes on the price of a house. In the two

previous sections, the focus was on the expected negative externalities due to noise and air pollution

from existing transport corridors and their expansion. In this section, other spatially determined factors

are discussed.

54
McClusky and Rausser (2001) used the HP model to estimate the effects of distance to hazardous

waste sites from housing properties. They incorporated perceived risk as a factor of determination

using the extent of media coverage on the severity of effects of the waste disposal sites. They paid

special attention to the inflated risk perception by the media and incurred loss of property prices. They

measured the perceived risk using property price data to assess the spatial effects (distance to the

hazardous waste site). Since it is well known that consumers choose housing locations according to

perceived risk, housing prices consist of discounts for locations which are affected by the perceived

risk (i.e. in this example, it is proximity to waste sites). Based on formal HP analysis, they used

structural, neighbourhood and location attributes and weighted the perceived risk (most important

variable) using the distance to hazardous waste sites thereby revealing the expected negative

relationship with property prices.

Courant and Porter (1981) posed a contrary view suggesting that the exact damage cost cannot be

measured by MWTP since they can be lower or upper bound values. Courant and Porter provided

theoretical evidence to show that averting expenditure will not provide even a lower bound to MWTP

values. Even where lower bound values for MWTP estimates are provided, they showed that the

difference between averting expenditure and MWTP cannot be attributed to non-aversive

consequences of dis-amenity.

Thayer et al. (1992) provide supportive evidence to McClusky and Rausser’s findings concerning the

housing price gradients from the hazardous waste sites. Proximity to the waste disposal site is used as

a proxy for the spatial effect of the waste disposal site. It was found that being one mile farther away

from the waste site added $US 1,349 to the price of a house. Thayer et al. further reported in the US

Environmental Protection Agency (USEPA) study of data derived from relatively industrialised states

55
that the negative impact from waste sites diminished with distance up to a point where property prices

reached a plateau.

Providing further evidence on the impact of spatial correlation on property prices, Irwin and Bockstael

(2001) tested simultaneous equation models to capture spatial autocorrelation. The process involving

the use of instrumental variables (IV) to avoid endogeneity problems in OLS estimation is examined.

They estimated the influences of the public open space land, privately owned open space, conservation

lands protected from development and privately owned developable lands on selected land parcels. It

was found that privately owned land categories are endogenously determined. Variables such as racial

composition (per cent of black population) and distance to more industrialised areas were also

included and, as expected, were negatively related to property prices. Privately owned open space was

linked to the probability of development and became significant when the IV method was applied. In

addition the percentage of population with tertiary or similar qualifications was shown to have a

positive impact on property prices - a correlation which is related to the income variable.

3.3 BEFORE AND AFTER HEDONIC MODELS

The hedonic function has been used in many environmental valuation studies to estimate the impact of

environmental externalities on property prices as a revealed preference approach. This was first

introduced by Rosen (1974) and has subsequently been used by others (Nelson, 1982; Palmquist and

Smith, 2002; Pope, 2008). All these studies emphasise the versatility of the HP method as a tool for

studying the price variation of residential properties. In this study attention is focussed on the buyers’

level of information about the negative impacts of the proposed projects (WBTN) that directly affect

the buyers’ tendency to purchase a residential property. Hence, a hedonic function is estimated in

which the number of years before and after the periods of the information availability is used to
56
measure the negative effects on the selected locations. Dummy variables are used to detect any price

variation of properties due to the presence of externalities for each year.

3.4 THE FUNCTIONAL FORM OF THE HEDONIC FUNCTION AND

THEORY

The functional relationship of the HP method shows that the price of a property is not solely

dependent on the product itself, but also on the levels of product characteristics that the product

embodies. Thus the price of a property (house) can be categorised by the values of individual

characteristics such as the implicit prices of structural, neighbourhood, locational, environmental and

market-based characteristics. The effects of these characteristics have been tested by researchers in a

number of different contexts (Hui et al., 2007; Lewis et al., 2008; Kilpatrick et al., 2007). Furthermore,

there are several functional forms that can be tested on the basis of the relationship between property

prices and independent variables and where the model diagnostics can be carried out to select the best

model (Lewis et al., 2008; Provencher et al., 2008).

This section provides details of the theoretical decomposition of the HP method and its application.

The HP models were first introduced to economics in the late 1960s. Lancaster (1966), Dhrymes

(1967) and Ladd and Suvannut (1976) were instrumental in formulating the basic theoretical

framework for the HP approach taking into account consumer goods’ characteristics. Cowling and

Rayner (1970) further developed the basic theoretical model to include brand names in addition to

quality characteristics. In this scenario, the total amount of utility obtained by the consumer from the

purchased goods is generated by the total amount of product characteristics.

However according to Freeman (1979) there are some inherent problems with the HP method given

that it ignores the assumption of free movement barriers where homebuyers move across regions
57
within the environmental quality gradient. Furthermore, such studies using the HP methodology ignore

the costs incurred by consumers for averting such behaviour. As Garrod and Willis (1999) pointed out,

the study by Abelson and Markandya (1985), identified the capitalisation of current environmental

improvements in property prices as well as future expected property prices as a discounted value on

property prices. The theoretical consistency of using the HP method in this thesis is therefore in its

ability to capture the values currently capitalised in property prices by the corridor expansions which

are expected to occur in the future. These future improvements or disbenefits are likely to be uncertain

and there is a degree of speculation over future improvements or disbenefits. It is consequently

reasonable to assume that the contemporaneous market price of properties contain a price

premium/discount relating to these future-bound market shocks (Garrod and Willis, 1999).

The effects of spatially varying factors are also an important category of HP method. This is because

environmental quality indicators such as temperature, scenic beauty, availability of public goods and

services have a spatial gradient (Carruthers and Mundy, 2006). From the point of view of inter-

regional and intra-regional aspects, household decision-making relating to dwelling location is

associated with the overall pleasantness of the surroundings.

In order to show the theoretical background of HP analysis, a simple utility maximisation model can

be used. A consumer purchases n products and each product has certain characteristics denoted by

X ij . The products and the characteristics are indexed by i and j respectively:

U = U( X ij ) (3.1)

Since the property purchases and their utility are considered separately, the utility function can be

58
 rewritten as follows by including the other numeraire goods ( ) to the utility function similar to the

Akerlof’s utility function4.

= +∑ ( ) (3.2)

Where U is the utility and X is a matrix of characteristics. The characteristics considered are total floor

area of the house ( X 1 ), number of bedrooms ( X 2 ), number of bathrooms ( X 3 ) distance to the nearest

park ( ) and so forth. The selected characteristics are assumed to best express the price of a property

since they are the characteristics consumers consider when they decide to purchase a property (house).

The selection of these characteristics is based on the main categories of structural, locational,

neighbourhood and environmental.

Hence the general hedonic function for a given property can be shown as follows:

= + + + + + (3.3)

The term is the property price. The , , are structural, neighbourhood and socio-

economic, locational and environmental characteristics respectively. The hedonic function is subject to

the utility function in Equation (3.4) as buyers maximise their utility on the basis of the quality and

quantity they receive from each characteristic:

4
However for further analysis other numeraire goods Y, are ignored as it facilitates to isolate the implicit price derivation for
the characteristics. Further, the level of the quality of characteristics, will be revealed through the buyers’ overall
valuation of the property through a questionnaire survey.

59
 = ( ( ) (3.4)

Q is a vector of quantities of the product characteristics consumed, P is the price of the i th product

characteristic and I is the income.

 PQ i i i =I (3.5)

The Equation (3.5) explains the total income or expenditure a consumer is willing to make for

purchasing of a property and the consumer has to maximise one’s utility (Equation (3.6)) with respect

to the budget constraint:

= + ( ) (3.6)

Equation (3.7) sets the Lagrange specification for the objective function Equation (3.4) and the

constraint function Equation (3.5). This approach is used since it facilitates obtaining the partial

derivatives with respect to the change of the quantity of the particular characteristic. The partial

derivatives explain the change of the utility generated by each characteristic with respect to the change

of the consumed quantity of each characteristic. This can be shown as follows:

= − − (3.7)

Equation (3.8) shows the partial derivatives of this maximisation problem. The important assumption

made in using partial derivatives is that if other factors are held constant (ceteris paribus) the quantity

of a particular product characteristic will affect the total price of the property (as an implicit price):

= ∑( ) − =0 (3.8)

60
Equation (3.9) describes this proportional value ( ) as quantity ( ) changes. The second term shown

in brackets in Equation (3.9) calculates the ratio of the marginal utility of the characteristic and the

marginal utility of income, I . Collectively, Equation (3.9) describes the marginal utility of the

product characteristic with respect to the change of the quantity ( ) that is reflected in its price:

 ∂U 
∂X i  ∂X i 
Pi =  ( )  (3.9)
∂Q j  ∂U

 ∂I 

The marginal yield of the j th product characteristic is given by . In Equation (3.10), it is assumed

that income equals total expenditure (E). Hence, the equation can be re-written as:

= ÷ (3.10)

Where the price of a particular product ( i ) can be considered as the ratio of the marginal utilities of

the product characteristics and the marginal utility of expenditure. This is the underlying concept of

the HP method that is used in this study to capture the prices of properties.

3.5 THE EFFICIENCY OF USING HEDONIC MODELS FOR

DAMAGE COST ASSESSMENT

The HP model is one of the indirect market approaches used to estimate damage caused by a negative

environmental externality. Hence it is a market based technique used to identify the impact of an

externality. Most studies have used hedonic analysis to calculate compensation for environmental
61
damage occurring from large scale projects based on the assumption of perfect information (Nelson,

1982; Palmquist, 1992). By assumption, this leads to ‘upper bound’ compensation. However, in the

absence of perfect information, the costs resulting from negative externalities are liable to be

underestimated. Other valuation techniques such as the contingent valuation (CV) method (a stated

preference approach) can also be used for damage cost assessment (Brookshire et al., 1982). However

stated preference approaches such as the CV method, can be shown to have their own biases (e.g.

strategic, payment vehicle, interviewer, starting point and aggregation). Whilst the hedonic approach is

market based (revealed in the market), the stated preference method (non-market based) approach is

based on the creation of a hypothetical market (with all relevant information provided) where

individual specific views on the values of the environment are assessed. Hence, biases are possible

and estimates can be less reliable. However in the absence of an actual market based structure which

facilitates the hedonic price method, stated preferences approaches are useful. Although MWTP values

are upper-bound under perfect information, it cannot be a possible scenario. This is because in this

thesis the assumption of perfect information is relaxed and it is revealed that the estimates derived are

likely to be lower-bound under perfect information assumption.

3.6 AKERLOF’S LEMON MODEL AND THE HEDONIC PRICE

METHOD

3.6.1 DECISION MAKING UNDER ASYMMETRIC INFORMATION

There is a wide array of literature on asymmetric information relating to financial markets, political

science and game theory. These studies have been useful in revealing information on individuals’

decision-making (Cramton, 1984; Cukierman and Meltzer, 1986; Daughety and Reinganum, 1992;

Gilligan and Krehbiel, 1989; Laffont and Tirole, 1991). In this study the focus is based on information

62
asymmetry between buyers and sellers when a transaction decision has been made in relation to the

residential housing market. In the HP literature, very little attention has been paid to the issue of

information asymmetry between buyers and sellers. In a recent study, Pope (2008) raised this issue

using the HP approach. However, Pope’s study was carried out under the premise of mandatory

disclosure of information which to a certain extent mitigates information asymmetry.

Previous studies have focused attention on price determination and investment strategies under

asymmetric information in the capital market (Frieden & Hawkins, 2010). Frieden and Hawkins

highlighted the importance of information flow for capital market stability and efficiency suggesting

that information flows help to develop dynamic laws in an economy. In a similar way, Greene (2008)

addressed the asymmetric information and agency problems in the sub-prime mortgage market. He

showed that when choices for consumers increase in housing finance, the tendency for them to be

worse-off is lower. However, Greene points out that in this scenario brokers can exploit asymmetries

in information to extract rents.

Garmaise and Moskowitz (2004) argued that information asymmetry is a critical problem in the highly

illiquid real-estate property market when compared to the used car market as examined by Akerlof

(1970). Hence the price structure is a weak instrument for signalling uncertainties to real estate market

participants. Furthermore, Greene (2008) argued that commercial properties and vacant lands are

idiosyncratic and hence become difficult for outsiders to value.

Ways to mitigate asymmetric information problems in the real estate market include the purchase of

nearby properties rather than distant locales (this is controlled for in the HP function) and by

examining properties with long income histories and avoiding trading with professional brokers who

are known to be well informed. Garmaise and Moskowitz (2004) in their study used both direct and
63
indirect information measurement variables. The direct information variable used was the coefficients

of dispersion (COD) of government assessment of properties - believed to be the best proxy

measurement for the correct market price. As an indirect measurement of information levels, distance

from the buyers’ previous location to the intended property purchase was used. The low-COD variable

represented the independent variables in the OLS regression. These proxies for information levels

were regressed with selected control variables.

Garmaise and Moskowitz (2004) in concert with Pope (2008) find strong evidence to show that

asymmetric information is a major problem in the real-estate property market. Such findings therefore

support full information disclosure by the introduction of mandatory reporting laws. However, there is

no study conducted to determine the effects of asymmetric information on the real estate property

market in the absence of mandatory laws. This research covers this gap in the literature.

The literature contains studies which described the way in which asymmetric information can lead to

consumers becoming informationally locked in. Thus, Nilssen (2000) in a study of the insurance

market, showed how this can occur where an insurer is given full details of the accident history of a

client over a period of time and used against potential rival insurance companies which have no access

to such information.

Turnbull and Sirmans (1993) showed that buyers’ have different information levels to each other when

purchasing a property. This affects their search strategy which ultimately increases search costs. It is

found, for example, that the existing information providing vehicles such as listing services (for

example, Oldlistings in Australia) were more likely to supply information to sellers rather than to

buyers. Moreover the buyers’ information level varies according to their experience in a particular

housing market (first time or repeated buyer) and their proximity to the market. Their search cost
64
therefore depends on these components. Turnbull and Sirmans also suggested that the prevalent

pricing system is not strong enough to supply better information to buyers. On average, each buyer in

the market has the same valuation of a given property, but their reservation prices vary according to

the level of information they receive, hence their increased search cost. Turnbull and Sirmans also

concluded that there were no symmetric price differentials across different types of buyers in the

market where first time buyers, repeat buyers, out-of-the area buyers and in-the-area buyers exist.

However in other studies in the literature the role of information asymmetries - where there is an

absence of mandatory disclosure laws relating to announcements of the major development projects on

property prices and their potential environmental externalities - are not considered.

As noted, much work has been conducted on information asymmetry in other areas. For example,

Cukierman and Meltzer (1986) considered the link between financial decision-making and the positive

aspects of information asymmetry. The study revealed that policy decision-makers prefer asymmetric

information to exist between policy makers and the general public when they decide on implementing

financial stimulus packages, so that the general public is made more aware of past monetary growth

and the need for monetary control procedures. This situation is analogous to asymmetric information

between sellers and buyers with an advantage to the sellers’ role. Daughety and Reinganum (1994)

explored the level of asymmetric information between a plaintiff and a defendant in a litigation

environment. They found that in such a situation, a plaintiff and a defendant have their own level of

private information which they use to make final decisions about possible agreements. Here the level

of information available to the plaintiff is related to the level of damage incurred while the level of

information available to the defendant is related to the likelihood of being found liable for the damage.

65
In this case the most efficient decisions are based on the mandatory disclosure of information by both

sides. This situation is similar to the study by Pope (2008).

Since mandatory disclosure of information in the Australian real estate market is non-existent, it is

important to consider the level of information available to potential buyers and its effects on house

purchasing decisions and the choice of housing locations. This thesis assumes that there is an

information gap which exists between buyers and sellers when it comes to negative externalities

arising from construction of road corridor and other projects.

As a remedy to the problems associated with asymmetric information between buyers and sellers,

Kennes and Schiff (2007) discussed the importance of creating actively operating market-based

reputation systems. Such systems regulate markets which suffer from information asymmetry by

rewarding sellers who sell high quality goods and imposing market based “punishments” for those

who sell low quality goods. While this process is designed to enhance social welfare it is only suitable

for a well-functioning market where tradable goods are exchanged. It is less suitable for an illiquid

market such as the housing market. Furthermore, the housing market involves ‘one- off’ transactions

in the majority of cases.

Gayer, Hamilton and Viscusi (2000) explored the role of information asymmetries in relation to the

existence of hazardous waste sites (a negative environmental externality), the way in which they

generate significant impacts on housing ‘choice’ decisions and residents’ higher willingness to pay for

removing and/or avoiding them. By examining the different levels of information residents possessed

regarding such an environmental dis-amenity Gayer et al. were able to indicate the different

differentiation in willingness to pay to avoid this problem. Hence, these market imperfections can be

66
further explained by the various categories of asymmetric information available between buyers and

sellers and the consequent effect on property prices.

The specific issues arising from the existence of asymmetric information between a buyer and a seller

prior to a transaction is discussed by Lee (2008). Lee noted that the owner of the property is generally

solely dependent on the seller to market the features of the property. However, the unexpected

decisions related to the potential negative effects, such as air pollution and noise, of the property

which are unknown to the buyer are settled through a negotiating contract. In this situation, a seller

(for example, a real estate agent) plays a middleman role depending on the extent of asymmetric

information between the house owner and the buyer.

It is hypothesised that the availability of sufficient information to buyers about the impact of

construction of infrastructure projects will have a larger impact than when information asymmetry

exists. It is for this reason that the literature review in Sections 3.1 and 3.2 dealt with some of the

major environmental externalities that arise from noise and air pollution.

3.6.2 INFORMATION DISCLOSURE

Information disclosure is one of the important aspects in combating asymmetric information in a

market. Inherently, all markets are to some degree inefficient due to their inability to satisfy perfectly

competitive market conditions. Hence there needs to be ways of identifying the reasons for market

failures and where government intervention is required. In the real estate property market, information

disclosure usually occurs by way of seller disclosure and it is therefore an option for buyers to search

for third party information sources to mitigate the information asymmetry. One of the main challenges

of this study is to find out how the buyers verify information they have before a purchasing decision is

made. The proposed algorithm is given in Section 3.6.6.

67
Wiley and Zumpano (2009) studied the seller/agency disclosure of information in different states of

the United States. Recognition was given to the fact that real estate brokers represented the seller

though they verbally represented the buyer when buyers searched for information about properties that

had come up for sale. It was observed that this confusion of seller roles led to a greater level of

disadvantageous information asymmetry for buyers of properties. Wiley and Zumpano estimated a

deterministic model of agency information disclosure with the vectors of independent variables of

buyer characteristics similar to the nature of the characteristics in disclosure forms such as licensee

education requirements and exam content variables (Pancak & Sirmans, 2006) as well as regulatory

and enforcement considerations. Further, Yosha (1995) discussed the trade-offs between the bilateral

and multilateral financial arrangements and their impact on firms’ stability given the level of

disclosure of verifiable information.

From a different perspective, Mesch and Beker (2010) focussed on the risks and disadvantages of

disclosing information in an online environment. They argued that computer mediated communication

can create an environment wherein participants misuse each other’s information for their personal

benefits. Further, this study notes that computer mediated communication is found to be less reliable

than to face-to-face and telephone communication. The rating of information sources’ verifiability in

this study’s questionnaire (Section 1 in the questionnaire) is designed to test the algorithm in Section

3.6.6. This is an important intuition particularly where, in searching for residential property

information, distant buyers cannot obtain credible information. If correct, it represents a valid

methodology to test buyers’ information levels according to their geographical position prior to buying

a property.

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Other studies indicate the positive buyer impact of mandatory disclosure. Delmas et al. (2010)

researched the effect of information disclosure of fuel mix in the US electricity market. This

environmentally driven disclosure of information related to electricity producers’ power mix of fossil

fuel and green energy. Delmas et al. studied each state prescribing user’s right to know the fuel mix

used to generate electricity. The study reveals that following the mandatory disclosure of information

under laws implemented by Public Utilities Commission, the demand for electricity produced by oil,

gas and coal decreased and the demand for green energy increased considerably.

Another study by Hibiki and Managi (2011) relating to information disclosure on carcinogenic

pollutant releases in Japan showed that housing prices responded to pollution variation within 0-1 km

from its sources. Since buyers had the ability to check pollution levels before buying a property, they

were then aware of the level of pollution of each firm in the area where their housing interest was

situated. In this study, pollution release was estimated on the distance based risk factor from its source.

Hibiki and Managi concluded that buyers only considered the distance band of 1 km from the

pollution source as the effective distance band for the pollution effect. The estimation results showed

that a 1% increase in carcinogenic risk reduced the average rent by 0.0007%.

Umehara and Ohta (2009) studied the impact of the government’s handling of disclosure of risk

information in Japan. The paper identified an information gap between the government and the public

given government agencies were generally reluctant to reveal risk information which could lead to

compensatory claims. For example, in the case of the JCO Tokai Nuclear Fuel Processing Factory

accident in 1999, the revelation of risk information the company ended-up in paying compensation for

crop damages due to rumours. In fact there was no actual crop damage but rumours of crop

contamination had reduced the demand for these crops. Umehara and Ohta therefore argued that a

69
guardian agent was needed to effect information dissemination. Stephan (2002) explored the way in

which information disclosure by governments can act as a facilitator rather than a coercer in solving

information problems in the environmental sector. They pointed out that release of information such as

Toxic Release Index (TRI) allowed the general public to made educated decisions based on

information about firms releasing pollutants into the air and waterways. In this way the government

was able to indirectly regulate emissions by providing the public the capacity to take action against

pollution to internalise emission levels. This situation can be compared to the condition where

insufficient information is available to market actors (participants) who are not able to make efficient

decisions about their transactions/mitigatory actions through the market process.

Samples et al. (1986) studied information disclosure in a survey relating to endangered species. In that

respondents were provided information about other respondents’ preferences, willingness to pay,

expected willingness to pay and it had a significant impact on their own preference levels in CV bids.

A study of information asymmetries in financial markets by Boot and Thakor (2001) revealed direct

and indirect effects of different types of information disclose on stock prices. The first type was

information available only to informed investors and which complemented the investors’ existing

information. The second type represented information provided which was non-rival and

independently used by all investors. The third represented substitute information which revealed the

information held by investors. Boot and Thakor reported that, irrespective of the kind of information

disclosed, it had a direct as well as an indirect effect on stock prices. As an indirect effect, investors

were incentivised to search for information about the information disclosing firm. This intuition is

substitutable in the real estate market because of the impact of negative (bad) information regarding

the appreciation of housing prices. Hence agencies/ sellers do not tend to reveal information about the

70
localised negative effects of the development initiatives/ industrial emissions in the absence of

mandatory disclosure by law.

Elliot and Jacobson (1994) in a study of financial information disclosure found that there were costs

and benefits for all the identified forms. Thus for non-disclosures (total right of privacy) and complete

disclosures (public right to know everything and anything) there were variously economic, political,

social and ethical costs. The study concluded that apart from the risk-free rate of return and economic

risk premium, the information risk premium is present when information disclosure is low during

transactions. This intuition is relevant to this study through the assumption there is a substantial

information gap between buyers’ and sellers’ regarding negative environmental and other effects.

Palm (1981) researched the publics’ response to earthquake hazard information. According to Palm’s

findings, buyers are highly unlikely to respond to information regarding environmental hazards when

they purchase a real estate property. They usually underestimate the risk given the distribution of

probability of a certain event. For example, when the probability was very low buyers tended to

average it to zero invalidating the available mandatory information.

Nevertheless it is acknowledged that measuring the way buyers make decisions and the contribution of

available information are difficult to measure with precision. This research gap is addressed in this

study where there is no mandatory legislation requiring disclose of available information to the buyer.

Using HP analysis, Fiva and Kirkeboen (2008) studied the effect of revealing previously unpublished

information of school quality on property prices. In the study, Fiva and Kirkeboen exploited a period

of sharp discontinuity of information to check the information shocks on property prices. The

information shock of school quality was provided for duration of 2 to 104 weeks. Further, Fiva and

71
Kirkeboen estimated the effect of this information shock on different time windows and found that

within narrow time windows there is no significant impact from information shocks on property

prices. Similarly, using a hedonic function Stanley (1991) studied school quality disclosure and its

impact on demand for properties in Norway. Stanley found a significant impact from disclosure of

such information on real estate property purchase decisions.

It is commonly acknowledged that in real estate property markets there is a general absence of

purchase-relevant information as can be seen in warnings on cigarette packages, estimated gas mileage

on automobile stickers and nutrition information on food products. This makes the real estate property

transaction more inefficient and leads to the hypothesis of Akerlof (1970) that consumers (buyers) are

not willing to pay above average market price (average product quality) due to the uncertainty of

information levels between the buyer and the seller. This leads to the absence of good quality real

estate property markets. In such situations the average price declines over time as the good quality

product sellers are discouraged and move away from the market. The quality distribution gets skewed

towards low quality products, thus creating a lemon market. In this way an information gap can lead

to a temporal devaluation of property prices.

3.6.3 ADVERSE SELECTION AND RESIDENTIAL PROPERTY MARKET

Adverse selection is a phenomenon that arises when there is an information gap between buyers and

sellers during a transaction process. Hence, highly informed parties can rent seek over less informed

parties when transactions occur. Jullien and Marriotti (2006) focused on how this phenomenon affects

the auction market and creates a lemon problem as identified by Akerlof (1970). They identify firstly a

centralised market intermediated by a monopoly broker in which symmetric information between

buyers and sellers is effected and secondly a decentralised market controlled only by the seller

72
creating asymmetric information flows. In an auction market, sellers have the advantage of being able

to reveal information which is related to the buyers’ valuation. However, this becomes true for ex-ante

verifiable information. In contrast Jullien and Marriotti investigated the interim stage where access to

buyers’ non-verifiable information leads to a sub-optimal trade. Hence sellers signal the quality of the

product by choosing a reserve price and by arranging a second price sealed bid with a public reserve

price. The findings of this study leads to a crucial assumption that buyers have monotone beliefs about

the quality of the object on sale.

However, any violation of this, for example revelation of sellers’ information on the quality of the

object on sale, will reduce the probability of sale of the product, depending on the actual quality of the

good and related buyers’ beliefs. Hence, this leads to a lemons auction market with asymmetric

information in a decentralised situation. If buyers use common knowledge for bidding then the

expected sale price will be low compared to the intermediated situation in a centralised auction

market. This means that in a decentralised market operating in an environment of non-verifiable

information, a level of market inefficiency will result due to information asymmetry between buyers

and sellers. Jullien and Marriotti further show that inefficiency arising from the ‘informed seller

condition’ leads to a marked reduction in sales. This issue of a lemon market resulting from

information asymmetry as it applies to real estate has not been addressed in the literature before.

Bigelow (1990) discussed the same issue from a different perspective proposing a new model for

adverse selection in line with Akerlof’s (1970) theory. Bigelow’s intuition is that there is an absence

of a signalling technology such as price variations with respect to the quality of a product. In this

model he examines the situation where there is an indivisible good which varies from high quality to

low quality [1, 0] and is continuously differentiable between these ranges. Here the optimal efficient

73
allocation of the good considered is dependent on the one-step allocation in the utility function which

is convex in form. A further outcome of this research is that inefficient allocation can be corrected

through governments imposing a simple ad-valorem tax.

In Charoenwong et al.’s (2010) study of adverse selection they found that voluntary disclosure of

information by firms is dependent on several factors such as the level of government ownership, the

level of inside ownership and the credibility of information disclosed. When firms’ shares are largely

owned by the government the adverse selections component is low. This is because firstly there is

little risk in disclosing all the information given the competitiveness of the capital market. It is also

because of the passive attitude of government share-holders who generally have little motivation to

increase investment performances. The level of inside (directors of the firm) ownership increases the

adverse selection component which rises as the firms’ directors become more willing to disclose

information to insiders compared to outside shareholders. In this situation information disclosure

within the firm is very high compared to that afforded outside shareholders. Charoenwong et al.

further showed that in some situations, even when there is a certain level of information disclosure by

firms with high outsider share-holder ownership and low credibility of information (or high

information risk), investors will ask for a greater return on taking on such information risks. Hence

this information gap between two parties will lead to sub-optimal Pareto-inefficient allocations

lowering the price of the good under exchange. In addition there is a possibility for adverse selection

to occur when the buyer is exposed to inferior information in the real estate property market.

3.6.4 RESEARCH METHODOLOGY AND ANALYTICAL FRAMEWORK

The investigation of asymmetric information has several applications. In this study a combination of

methodologies is considered in order to capture the effects of information asymmetry in the real estate

74
property market and to examine its impact on buyers and sellers. The theoretical framework used in

this study was proposed by George Akerlof in his ground breaking article in 1970. Even though this

theoretical explanation was used for the second hand car market it is applied to the real estate property

market given the similarities of the way in which these markets operate. The methodology used is

largely dependent upon utility maximisation with respect to the quality characteristics faced by each

household regarding a property. Hence, the study is based on hedonic valuation, under information

asymmetry where the hedonic coefficients are not efficient. In order to overcome this problem the

buyers’ understanding of these quality characteristics after purchasing the property is evaluated

through a survey questionnaire. The utility function proposed by Akerlof and the utility function used

in the HP method have similar characteristics (additive utility functions). Hence, a variation of the

Akerlof model is used as the theoretical basis for this study.

Akerlof’s model for markets under information asymmetry can be used in this study without

theoretical complexity because the quality characteristics of cars and residential properties are able to

be explained by a HP function. Hence, the utility function which is assumed in the hedonic function

and the Akerlof’s asymmetric information model has similar properties and the theoretical

assumptions across these models remain unchanged.

Akerlof proposed that under information asymmetry, there inevitably exists two product markets

unobservable to the buyers. They are ‘good quality products’ markets and ‘bad quality products’

markets. Buyers are seen to frequently intermingle between these product markets given the skewness

of the level of information they possess. Hence, sellers have the chance to sell a low quality product at

the price of a high quality product and obtain a higher surplus. This surplus can then be used to buy a

good quality product (in this case a residential property). This situation directly affects the welfare of

75
the buyer. In this study the same analytical framework proposed by Akerlof is followed given it is

empirically related.

According to Akerlof’s explanation, under asymmetric information buyers would not be able to

distinguish between two product qualities leading to a situation where better quality products are

replaced by bad (poor) quality products; medium quality products are replaced by better quality

products and good quality products replaced by lesser quality products. Under these conditions the

market ultimately collapses.

In this form of information asymmetry, buyers do not have the ability to screen the quality of products.

This is because the private information which sellers possess is hidden to the buyers. Hence, buyers

tend to search for goods that are of average quality. Therefore, their demand is derived by the average

quality, , of the product and its price, , which can be shown as follows:

= ( , ) (3.11)

For this hypothesis the quality as well as the supply of the residential properties is a function of the

price. Hence, it can be assumed that the quality and the supply of residential properties have a linear

relationship with the price.

Let the quality be defined as follows:

= ( ) (3.12)

Let the supply of residential properties be defined as:

= ( ) (3.13)

76
However, the quality characteristics and hedonic features of residential properties are different to that

of the second hand cars. Nevertheless the model is still a valid candidate to explain the information

asymmetry in the residential property market. This model of information asymmetry is based on the

theory of utility maximisation given the information level each market participant possess, and a priori

expectation that sellers are superior in possessing information compared to buyers. This represents the

most important assumption in this study.

This study’s particular focus is on information asymmetry between sellers and buyers which leads to a

loss of efficiency in transaction decisions. The best way found to explain this scenario is to use the

utility theory as proposed by Akerlof where buyers’ expected utility is high. In this situation, it is

assumed that sellers have a utility function as shown in Equation (3.14):

= + (3.14)

In this utility function, ‘Y’ is the numeraire goods other than the residential properties. is the quality

characteristic of the ith residential property. This utility function is similar to the utility function used

in the hedonic function which is discussed in detail using Equation (3.15).

It is assumed here that the quality varies from 0 ≤ ≤ 2 and the utility function5 of buyers’ can be

shown as follows:

= + ∑ (3.15)

5
Buyers expect average quality. Hence they usually equate the average price to average quality. Therefore they make
transactions based on the average price.

77
The utility functions (3.14) and the (3.15) are assumed to have the same characteristic where the

addition of a new property gives the same utility. Also as per Akerlof’s theory, it is assumed that both

the buyers and sellers are von Neumann-Morgenstern maximisers of expected utility. According to

this utility theory, by ignoring indivisibilities the demand for residential properties is generated by

both buyers and sellers. In this scenario, there is an assumed advantage for the sellers to sell low

quality residential properties at the price of high quality properties and obtain a surplus due to the

presence of information asymmetry. Thus sellers have the opportunity to buy a new property with

higher quality (with high ) from their previous sale (income), , derived from selling products

( and are the price and the number of products consumed by buyers). It is acknowledged that

sellers have comparatively more (and correct) information of the products compared to prospective

buyers and it is assumed that the number of properties (n – N) possessed by sellers at a particular time

(t) is higher than buyers (0-n). Similarly in Akerlof’s lemon model it is assumed that sellers are

superior in ‘information possession’ compared to buyers who have only average knowledge ( )

about the quality of the products.

In discussing Akerlof’s findings Lofgren et al. (2002) makes the assumption that low and high quality

products are accessible to buyers in quantities and (1 − ) respectively. Thus buyers choose the

products with average quality since they cannot observe the level of the quality at the time of

purchase. According to this explanation, one unit of low quality house is worth to the buyer

whereas the value of a high quality house to buyer is > . However, a seller with superior

information knows the true value of the good at < and < . This information

differential is accordingly advantageous to the seller. In a regulated market where low quality and high

quality product markets are separated, all prices between and would support the mutually
78
agreeable transaction for low quality products and all prices between and would support the

mutually agreeable transaction for high quality products. However, in a situation where both markets

are merged and cannot observe the quality differences, a rent seeking seller could sell a low quality

product at the price of high quality product. This situation would lead to high quality product sellers

setting their prices above the average price consumers’ would be willing to pay. This condition can be

represented as > where average consumer expectation of the value is = + (1 − ) .

Since this does not satisfy the price expected by the high quality product sellers, they would decide

to leave the market and low quality product sellers come to dominate the market. An empirical study

by Izquierdo and Izquierdo (2007) provides clear evidence of this eventuality. This situation is

exemplified in Figure 3.3.

Demand for quietude/visual amenity/comfort

Price Supply of high quality

properties

A
Supply of low quality
properties
B

Quantity of quietude/ visual

amenity/ comfort (distance proxy)

Figure 3.3: Demand for quietude/visual amenity/comfort (Compiled by Author)

79
Figure 3.3 shows the demand/supply and consumer surplus for different sellers in the property market

based on the work of Lofgren et al. (2002) and Nelson (1982). Since low quality sellers can sell with

the price between and due to asymmetric information, they can obtain the total surplus

(A+B) over time6. However, high quality sellers do not agree to the average price , and hence they

gradually move away from the market. Thus the average quality of houses in the market is reduced

over time while locking out good quality sellers.

This explanation can further be used to explain the decomposition of Akerlof’s utility functions as

described below. The mathematical solution from Equation (3.16) helps in the understanding of how

the average quality does relate to the average price and how consumers make decisions based on it -

thus leaving only low quality goods in the market.

( , )= + ( ) (3.16)

In the above expression, ( ) (0≤ ≤ 2) is the density of quality per unit of residential property and

is the quantity of other numeraire goods.

6
It can be assumed that based on Akerlof’s intuition with time there is a potential for sellers near the transport corridors to
sell their properties at the price of properties which are located farther from the corridors (with higher values). This is
because of the asymmetric information between buyers and sellers. Hence low quality property sellers’ can obtain a
surplus. These properties can be marketed and bundled as a different set of commodities by providing positive features
such as being close to road corridors that can indirectly undermine the negative effects of road corridor expansions.

80
Figure 3.4 shows the density of the quality of products.

Quality

X(t)
2

N Total number of goods

Figure 3.4: Density of the quality of products (Compiled by Author)

Hence, the total quality of residential properties depicted in Figure 3.4 can be estimated as follows:

( )= (3.17)

= = − (3.18)

Let ( ) represent the number of properties with a quality less than or equal to . Since the quality is

uniformly distributed over the total number of properties and assuming number of properties of quality

is no more than one half of , then the quality follows that:

= ( )= (3.19)

( )= ( )= , ∈ (0, ) (3.20)

81
In this example group one generates their income from the sales of properties. Hence they derive their

utility as follows:

+ ( ) = ℎ ℎ

Here it is assumed that group two is searching for properties and they do not own residential

properties.

Hence, their utility function can be written as follows:

( , )= + ( ) (3.21)

Hence, their utility maximisation can be explained as:

3
+ ( ) (3.22)
2

subject to + = ∶ =

In this an a priori expectation is that sellers know the quality of each house they sell and their supply is

shown in Equation (3.23):

( , )= + ( ) (3.23)

= + −

82
 Given = ∗ ,

+ −

According to the considered maximisation problem, it achieves a maximum when:

= − (3.24)

( ) ( )
= (3.25)
( ) ( ).

2
= (3.26)

Hence: = ( ) = min{ , } (3.27)

Equation (3.27) is shown graphically in Figure 3.5.

Total number
of products -
N
S(p)

2 Price (q)
Figure 3.5: Supply of products given the quality (Compiled by Author)

83
The average quality of the residential properties can be denoted in Equation (3.28). This is generated

from the intuition that total quality of the market at price is divided by the total units of the market at

price .

( ).
( )= (3.28)
2

According to the buyers’ maximisation problem,

3 3
+ ( ) = (3.29)
2 2

This follows the constrained maximisation problem shown in (3.30):

3
+ (3.30)
2

+ =

0 > 32
= ( )= 0, = 32 (3.31)
< 32

84
The demand function for the residential properties given the expected quality is:

D (P)

3/2µ P (q)

Figure 3.6: The demand for residential properties (Compiled by Author)

According to the demand function in Figure 3.6, when the price exceeds the expected average quality,

demand drops to zero. Hence buyers, due to their uncertainty, are demanding average quality products.

The price of the products under this scenario cannot satisfy the high quality product sellers who will

exit the market leaving behind only low quality sellers. This is the main intuition from Akerlof’s

explanation of the asymmetric information in market transactions and which can be used to explain the

decision making of buyers and sellers in the residential property market.

85
3.6.5 THE TEMPORAL EFFECT OF INFORMATION ON DECISION MAKING
IN THE RESIDENTIAL PROPERTY MARKET

In this proposed model, it is postulated that consumers’ decision making is directly affected by the

information flow to which buyers were/are exposed. This information flow has a time component in its

influence on decision making with contemporaneous and lagged effects. Furthermore, this level of

information is categorised into a validation process through a theoretically legitimate verification

process which is dependent upon the residential property market’s specific characteristics. These

characteristics are the sources of information (property agents, residential tenancy authorities and

informal information through previous buyers): the verification process is achieved by cross checking

the information through various sources. To a large extent the information available explains the

rational consumer’s decision-making process depending on their ability to process the information and

the verification approaches they adopt.

3.6.6 THE PROPOSED PROPERTY BUYERS’ DECISION-MAKING PROCESS

In this study the model in Equation (3.32) for buyers’ decision-making is proposed and will be

empirically tested using a questionnaire survey.

( ,) = ℎ ℎ ℎ ( ,) ( ,) )

∶ ( ,) >0 (3.32)

Equation (3.32) will elicit the factors affecting buyers’ decision-making to make optimal trade-offs

among available goods (housing commodities and other numeraire goods). This method can also be

used to evaluate the information shocks in a particular time point and how housing prices fluctuate.

This method represents an extension to Akerlof’s explanation of the asymmetric information and the

bargaining process as explained in terms of the average quality equivalent to the average price.

86
However with a few exceptions in the finance literature (Jullien and Marriotti, 2006; Yosha, 1995),

there is a lack of discussion about the verification of information when a purchasing decision is made.

Izquierdo and Izquierdo (2007) argued that information shocks generated through social networks

could solve the quality uncertainty problem in the market. However, these information shocks also

show a lag effect as they spread over time. This is an important factor which needs to be considered

when a residential property transaction is made and which facilitate the buyers’ aims to make the most

efficient transaction decision(s).

Equation (3.32) can be explained further by expanding the premise that underlies the model. In this

explanation it can be deduced that has a linear association with the information available

to buyers (Stigler, 1961). Hence, the buyers’ rationality solely depends on the quality of the

information they use when they make transactions. However, has a contemporaneous as

well as a time lag effect with . can be explained as follows:

( ,) = ( ,) ℎ 0= − , 1= )

(3.33)

Hence, it can be assumed that the quality of the transaction decisions made is an increasing function of

the level of understanding at time for all positive quantities of .

However, the decisions made by buyers are not completely dependent on current knowledge. Instead,

there is a time-lag effect of information where buyers depend on previous information rather than the

contemporaneous information when decisions are made. Hence, the above relationship can be

rewritten by including the temporal effect of information as follows:

87
 ( ,) = ( ( ,) + ( ,) + ( ,) + ( ,) + ( ,) + ( ,) + ⋯+

( , ); , =

ℎ . (3.34)

It is a basic assumption in this study that buyers use previous information for decision-making when a

residential property transaction is made. This is because the current up to date knowledge is not

available to buyers. Furthermore, in this study an attempt is made to capture the temporal

shocks/impacts of information that becomes available to the public (buyers) and demonstrate how this

information could have an impact on the decision making process. It is hypothesised that this

‘impulse-response’ pathway is likely to have a significant impact on the decisions made on the quality

parameters of the residential properties.

The information shocks along with the anecdotal evidence of the quality parameters of residential

properties are hypothesised to have an impact on individual demand for properties. This phenomenon

is only partially considered by Jullien and Mariotti (2006) in the auction market and by Daniel, Florax

and Rietveld (2009) when considering the role of reliable information in deciding compensation for

flood hazard victims. Furthermore, the effect of information cannot generate a contemporaneous

impact on the decisions but it is generally observed after a particular time lag. Hence, it is

hypothesised that this information influence process - which has a current impact (impulses) on the

transaction decisions - has a ripple effect with the time lagged shocks of previous information. This

information revelation can be captured using a questionnaire survey which elicits the level of

information for individual buyers who were exposed to previous information shocks in the property

market and which are discussed in Chapter Five. Based on this hypothesis, property price variations

that can be captured by the HP method are further investigated.

88
3.7 CHAPTER SUMMARY

In this Chapter the theoretical structure related to the basic hedonic model and Akerlof’s asymmetric

information model are discussed. The theory regarding the hedonic model is shown to be helpful in

understanding the hedonic spatial model and its improvements (which is discussed in Chapter Four).

Most importantly the theoretical analysis provides a means of revealing the substantial connection

between Akerlof’s lemon model and the hedonic price model through a utilitarian approach. In this

chapter, a linear-linear HP approach only is used to discuss its basic properties. However, there are

many other forms of hedonic methods which include log-lin, lin-log and log-linear. The objective has

therefore been to provide details about the fundamental approach but not the deviations. One of the

important features of this chapter is the discussion on welfare estimation. The marginal effects (

coefficients) of the determinants are defined as the welfare changes (Palmquist, 1992) which is the

basis of compensation programs. However, in the Akerlof’s model, the perfect information assumption

is relaxed whereas the hedonic model is based on it. Also in this thesis there is no control for full

information, but rather for information related to the WBTN scheme and its announcements. Hence,

the welfare changes are justified using a control site analysis outlined in Chapter Six. The factors

affecting the level of information asymmetry related to the WBTN scheme is discussed in Chapter

Seven.

According to the Chapter’s analysis of Akerlof’s model, the average price is the observable

phenomena of the average quality. Hence, any change of average price can be shown to reflect a

change of average quality in a positive or negative manner. As Akerlof has pointed out, if it is a

negative change (a decline of average price), then there is evidence of significant information

asymmetry. This issue is examined in Chapters Six and Seven.

89
CHAPTER FOUR

HEDONIC SPATIAL ANALYSIS: AN INNOVATIVE

APPROACH
4.0 INTRODUCTION

The intention of this chapter is to provide a detailed overview of spatial dependence or spatial

autocorrelation of property prices in the selected areas. This method corrects for spatial dependence of

property prices and is designed to provide efficient estimates in the hedonic analysis. The expected

contribution of this analysis is to fill certain gaps in the literature. They are to clarify the rationale

behind selecting the weight matrix, comparison and discussion of the drawbacks of different analysis

types, to provide a better estimation procedure for spatial lag and spatial error models and to reveal the

contagious effects of property price variations in a given locality. A discussion of the selection of an

appropriate coordinate system for spatial analysis is dealt with in detail in this chapter. Given the

announcements of the WBTN scheme have now been made, the effect on property prices of the

resulting temporal shocks will be evident. Apart from these temporal shocks, the spatial dependence of

property prices plays a vital role.

A comparison of spatial models and other model specifications is used to assess the model fit. The

evolving literature on hedonic analysis is also applied to determine the most efficient estimates and

inferences. The classical HP analysis is debated in light of the increasing literature on the spatial

autocorrelation (see, for example, Anselin, 1988; LeSage and Pace, 2009; Wilner, 2010).

This chapter which has eleven sections addresses research objective six and research question seven

outlined in Chapter One. This chapter’s findings provide enhancements to the hedonic model as

90
discussed in Chapter Three. Section one discusses the importance of considering the concept of

‘space’ in hedonic analysis. This is because until recently spatial analysis in HP method has been a

grey area in the literature. Section two undertakes a literature review of hedonic spatial analysis.

Section three provides the basic structure of the matrices while Sections four and five show the

importance of using coordinate systems in spatial analysis. Section six outlines the important features

of spatial weight matrices. The differences of Euclidian and geographic coordinate systems are

discussed in Section seven. Section eight provides a description of the data collection method required

for spatial analysis. The phenomena of spatial autocorrelation are discussed in Section nine. Section

ten compares the results of spatial geographic and spatial Euclidian processes, while Section eleven

summarises the findings of the chapter.

4.1 SPACE MATTERS

In economics it is common to analyse spatially distributed economic variables and therefore it is

important to show the role space plays in HP analysis. Some examples of economic variables which

encompass geographical relationships (dependence) are GDP, inflation, unemployment and crime

rates. House prices too have geographical relationships and hence it is important for such relationships

to be included in HP analysis. It is now widely acknowledged that incorporating the effects of spatial

dependence will result in robust estimation results (see, for example, Anselin and Lozano-Garcia,

2009; Izon et al., 2010). In spatial analysis the values of different elements of space are assumed to be

correlated if they are generated from a common source of factors. This condition can be further

illustrated using Tobler’s first law of geography. The essence of this law is that "everything is related

to everything else, but near things are more related than distant things." This seemingly simple idea

was the turning point in spatial analysis. Hence, the existence of measurement for spatial connectivity

91
and contiguity is a basic necessity for spatial analysis. The definition for this spatial neighbourhood

has been defined in different contexts based on ‘contiguity’.

Spatial correlation has been defined in different contexts by many authors. Some have found that it is a

cross sectional existence of similar values (spatial dependence) and dissimilar values (heterogeneity)

(Anselin, 1988). The extension of the cross sectional analysis argument can be used to explain the

simultaneous effect of time series and cross section data (panel analysis) (Parent & LeSage, 2010;

Shehata, 2012).

The focus in spatial analysis is the spatial unit of interest. The literature identifies a number of

different types of spatial units such as spatial point patterns, spatial polygons, triangles, hexagonals,

lines and grids (Baddeley, 2010; de Smith, Goodchild and Longley, 2009). These different spatial

units provide unique ways of analysing each problem of interest. Hence, the algorithms generated by

relevant technical methods should be based on the core unit of spatial analysis avoiding common

generalisations from non-applicable alternative methods. This is important because capturing the

intensity of spatial dependence/heterogeneity is test specific and may not be well explained in

incorrect functional forms. Therefore, ex-ante diagnosis of spatial dependence is imperative for any

kind of spatially determined processes.

In the spatial analysis of geographically distributed data, they are correlated across space because of

sharing common attributes in space. Hence, the level of sharing determines the values of these

observations. Therefore, according to Tobler’s law, the adjacent or neighbouring locations (e.g houses)

have a high probability to share common attributes compared to distant locations. The limit of the

influential ‘space’ is determined by several space related vectors. They are in the form of distance

decay patterns, nearest neighbours, and contiguity with limits of ‘maximum and minimum’. The basis
92
of adjacency (distance or nearest neighbour or contiguity) is determined by the kind of spatial unit of

interest.

This study uses property (house) price as the key ‘spatial’ unit of interest which display distance decay

spatial influence and draw data from properties of point pattern distribution. The house price is

determined by its own attributes as well as that of its neighbours (e.g. type of garden, architectural

design, size of the land) which when combined may have a cumulative effect. Hence, it is imperative

to consider these spatial effects when the property prices are determined empirically. Until the last

decade most of the empirical models (for example, HP method) failed to include these determinants.

Therefore, the coefficients estimated for these models were prone to bias and inconsistency where the

lag effect was not considered (analogous to the situation of omitted variables). The estimates are

inefficient where the error effect was not considered analogous to the situation of serial autocorrelation

in time series.

4.2 LITERATURE REVIEW OF SPATIAL ANALYSIS AND NEEDED

THEORETICAL IMPROVEMENTS

The earliest studies on spatial analysis date back to the 1950s. However, they failed to explain the real

impact of spatial dependence based on correct contiguity due to the under-development of the

techniques and theoretical know-how. A problem that arises when spatial dependence is overlooked is

that it leads to a high probability of rejecting a true null hypothesis (Type I error). Griffith and Layne

(1999) showed that incorporating spatial dependence could increase the explanatory power of a

predictive model by approximately 5%. It was also shown that demographic and socio-economic

characteristics of a population as reflected in house prices are highly subject to positive spatial

autocorrelation.

93
Moran (1948) and Geary (1954) first coined the word ‘spatial correlation’ based on the contiguity

weight matrices. The evolution of spatial analysis kept pace with the evolution of related branches of

social, natural and geographical sciences (for example, GIS, economics and biological sciences).

However there are gaps in the theory of spatial analysis which went unnoticed until the 1990s

(Kelejian and Prucha, 1998: 1999; Kim et al., 2003; LeSage and Pace, 2009). The first and foremost

study that can be considered seminal in spatial analysis is that of Cliff and Ord (1970). They showed

the importance of including the spatial component in analysing geographically confined data. The

background to this work was undertaken by Tobler (1970). Cliff and Ord (1970) were the first to use

the intuition from Tobler’s first law of geography in a meaningful manner. The Poisson and binomial

distributions used by them was based on a quadrant counting process used to estimate the cross

sectional dependence of quadrants or number of counts. Cliff and Ord’s (1970) analysis into spatial

relatedness identified spatial dependence as a problem rather than an avenue to explore. Hence, they

recommended avoiding spatial dependency by using econometric techniques.

Cliff and Ord’s work and Tobler’s contemporaneous input to geographic relatedness led to the concept

of the ‘lattice structure’ or ‘weight matrix’. Cliff and Ord also discussed the analogous relationship

with time series autocorrelation. Their work provided the basic foundation required for the algorithms

in spatial analysis that are widely used today. They used global spatial dependence measures such as

Moran’s I and the Geary’s C as a basic explanation but without further analysing the level of spatial

relationship in terms of the level of neighbourhood or distance limit. The lattice weight matrix has

been used to weight the Poisson observations but without a proper standardisation procedure. The

lattice structure for the weight matrices have been extensively discussed and used by Besag

(1972:1975) and Besag and Moran (1975).

94
The intuitions gained from spatial analysis in a range of study fields have made essential contributions

to developing and improving the analytical framework of HP analysis. In a biological study by Sokal

and Oden (1978), the basic structure for the contiguity weight matrix was used and is still applied in

generating contiguity weight matrices and spatial patterns. Sokal and Oden showed that spatial

analysis can be used not only for continuous data, but also for categorical data (nominal, ordinal and

interval).

The studies discussed until now have not provided a clear picture of the spatial process existing in the

data set. No critical analysis has been made of the underlying spatial process except in the case of

global spatial correlation. The early studies which considered spatial autocorrelation were based on

spatial error dependence (Johnston, 1984; Kennedy, 1985). This phenomenon is discussed in depth by

Dubin (1988) by considering the core analogy between time series autocorrelation and spatial

autocorrelation.

However, the distinct factor in spatial autocorrelation/dependence that deviates from the analogy of

time series autocorrelation is the dependence of the dependent variable over spatial units across a

geographic gradient. Dubin (1988) further showed that the properties of spatial autocorrelation mostly

arises as a function of distance. The problem of not considering spatial autocorrelation therefore gives

rise to issues of measurement error and omitted variables bias, an issue similar to autocorrelation.

Thus spatially adjacent properties tend to have a similar score of omitted variables. In Dubin’s study

the log-likelihood test is used to distinguish the best maximisation procedure (a key test diagnostic in

most software packages (e.g. Stata and GeoDa). However, Dubin’s proposal of a parameter for spatial

effect is implicitly involved with distance. A clear identification of the distance band is not specified

and a discussion of the spatially lagged dependent variable is lacking.

95
In the field of biological science, Legendre (1993) investigated the generation of spatial dependence

due to patchy relationships (interaction of biotic connections) of biotic units. However, the inclusion

of a spatial dependence parameter was not considered in the analysis. As Anselin (1988) argues,

theoretically, the inclusion of a spatial weight matrix which generates spatial dependent parameters in

the analysis is a vital factor in spatial autoregressive analysis.

The common approach in diagnosing the presence of spatial dependence is to test for

heteroskedasticity in OLS residuals. If the null hypothesis is rejected due to a high chi-squared value,

then there is a high probability of the presence of spatial autocorrelation occurring in a cross-sectional

spatially distributed sample. The usual way of correcting this problem is to use symmetric weight

matrices to standardise the spatially autocorrelated error terms (Anselin, 1988). In this context there

are several ways of constructing weight matrices for spatial analysis. One way is to encompass the

whole structural stability of the estimated model (spatial lag, spatial error and spatial autocorrelation

(SAC) models) given it has been shown that other models can generate inconsistent estimates due to

estimation procedures being less robust (see, for example, spatial 2SLS and Spatial Durbin) (Kelejian

and Prucha, 1999).

Furthermore, using different types of spatial weight matrices are dependent on the spatial distribution

of observations. For example, point and polygon patterns require different weight matrices to maintain

the symmetry of the matrix as do clustered and dispersed point patterns (distance band and nearest-

neighbour respectively).

Kelejian and Prucha (1999) showed that the generalised method of moment estimation (an extended

version of FGLS) is one form of estimation which can be used in the absence of proper estimation

methods for spatial data. More importantly, this methodology corrects for heteroskedasticity
96
associated with the error term using weight matrices. However, the generalised method of moment

estimation has its own technical difficulties in estimating large samples (for example MATLAB has

memory limitations in estimation). In this thesis our estimation procedure suggests opportunities to

overcome the technical limitations of estimation.

Tse’s (2002) work on estimation of spatial models showed that spatial autocorrelation is due to

omitted variables of unobserved neighbourhood characteristics or due to systematic measurement error

of the characteristics. Hence, the errors are spatially correlated (in a cross-sectional data set) and the

general hedonic function is not able to capture these effects. Tse also demonstrated that income,

localised amenities of the environment and public utilities can have a significant positive impact on

house prices. Therefore, changes to these amenities and socio-economic factors across space could

create a bias in cross-sectional datasets. Tse incorporated the effect of spatial dependence by

rearranging the constant term so as to isolate it from the random disturbance term. This created

coefficients that were more efficient and consistent through the inclusion of spatial dependence in the

hedonic model.

Anselin (1999) identified the time series similarity with the spatial process as an autoregressive and a

moving average process. This definition is a more convenient way to understand the spatial stochastic

process as it relates to the time series stochastic process. However, it should be noted that the

underlying empirical process is not similar to the time series process. Hence, care should be exercised

in determining the correct terminology. The important contribution Anselin (1999) makes is in the

definition of the differences of the available spatial processes. In most of the cases in spatial studies,

spatial autocorrelation and spatial heterogeneity are mistaken for each other. Spatial autocorrelation or

dependence arises from clustering or in most cases by a homogeneous process while spatial

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heterogeneity comes from mean variation of observations by each location. Hence, the differences

need to be carefully accounted for in model estimation. Models should be structured to generate

interpretable parameters for each of them. Nevertheless, according to Kelejian and Prucha (1998)

heteroskedasticity is an unavoidable phenomena in spatial analysis.

Fingleton (2008) has undertaken a comprehensive comparison of SAR, SARAR and SARMA models

using Monte Carlo simulation. The spatial dependence of the error term is defined in these different

contexts and described. Fingleton showed that spatial dependence does not solely depend on error

autocorrelation but also on a rebound effect from the localised shocks. This shock creates a global

shock only when it affects the nearest neighbours as a spatially degenerating process with the resultant

shock to neighbours generating a rebound effect. Fingleton further used Monte Carlo simulation to

perform a spatial moving average process instead of the naturally occurring spatial dependence with a

contiguity weight matrix. This method helps to overcome the problems of endogeneity involved with

the error term and the dependent variable. As it compares with the natural spatial process (using

weight matrix), the simulation provides a limited range of information to explain the variation of the

spatial parameters. However, it overcomes the problem of deriving parameters from an unknown

distribution by assuming normality in the simulation.

There are a number of effective ways of estimating spatial models when cross sectional data are

available. Maximum likelihood method (ML) has the highest preference of social scientists (Anselin,

1988; Anselin and Florax, 2011; Izon et al. 2010). However it has inherent limitations for large

samples. Also some assumptions of ML method do not satisfy the requirements of SAR model

attributes (the notion of sample size is insignificant in the ML method (Mardia and Marshall, 1984).

That is not appropriate where sample size plays a significant role. By definition spatial dependent

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parameter is the weighted average of the disturbance term in a particular spatial unit. This situation is

quite similar to the generalised least squares method (GLS). Hence according to the Kelejian and

Prucha (1999) the most consistent estimate of (spatially dependent parameters) can be

obtained by the generalised methods of moments (GMM). However, it is not an efficient estimate

(Ord, 1975). In contrast, the Monte Carlo simulation results provide that it is as efficient as the ML

estimate. This leads to estimation complexities due to the actual realisations of spill-over effects of a

spatially dependent process which involves wider boundaries. In this thesis, it is argued that the ML

estimation can further be improved by clarifying the estimation methods using much better approaches

for calculating weight matrices. Our suggested method involves flexibilities when data restrictions are

present and refining the existing algorithms.

Kelejian and Prucha (1999) have suggested a new approach to the GMM method for large samples

where the ML procedure would appear to have problems unless the assumptions of sparsely and row

normalised weighting matrices hold. Although they are of the view that there are no model

specifications for the estimation of spatial lag and spatial error model simultaneously (SAC model in

Stata), they later stated that new methods of ML procedure have been developed which can feasibly

estimate large sample spatial models. This is due to improvements in computation abilities of

computers. Hence ML procedures now have the capability of generating consistent results for large

samples. However one drawback in their method is that it generates a large number of autoregressive

instruments that increase the problem of heteroskedasticity. Since their method does not account for

robust standard errors, the estimates are not consistent even though they are unbiased. This method

also lacks a model diagnostic procedure - an important component in spatial analysis. Without such a

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diagnostic procedure, post estimation outcomes do not guarantee the correct functional form even

though they provide “quasi-fitted” models.

Despite this weakness, their method is applicable because it overcomes the distributional assumption

problems of the ML method when it comes to large sample estimation.

4.3 THE SPATIAL WEIGHT MATRIX AND ITS PROPERTIES

In spatial analysis there can be different types of spatial relationships depending on how the elements

are related in the ‘space’. This is an important step in spatial analysis because it determines the total

meaning of the interdependence of the spatial elements. Spatial autocorrelation is diagnosed as

positive and negative spatial autocorrelation based on the clustering pattern of the observations. The

objective of spatial analysis is to identify the effect of the spatially dependent patterns of observations

on an individual observation or in other words to identify potentially explicable patterns (PEP)

(Anselin, 2009). There are several spatial patterns such as spatial polygons, spatial points and spatial

lines. However, the most commonly used patterns are spatial polygons and spatial points as shown in

Figure 4.1. Spatial polygons are useful to analyse macro level data such as state-wide observations and

country-wide observations. Spatial point patterns are useful to analyse localised data such as points

which are observable with the naked eye. They can include not only property prices but also

microscopic data points including spreading patterns of cancer cells.

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Figure 4.1: Basic spatial patterns (Adapted from Google Image)

The spatial weight matrix is defined and created on the basis of actual interactions between objects in

focus. In the literature on spatial weight matrices, key differences in structure and elements they

contain are identified. Two different basic structures are observed namely contiguity based and

distance based. The contiguity based matrices are usually applied to the observations of common

boundaries. The distance based weight matrices are applied to observations which have a point pattern

distribution or line segment distribution. Contiguity weight matrices have three main types. They are

termed rook, bishop and queen and are categorised on the basis of the level of adjacency.

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 Figure 4.2: Spatial spill-over patterns (Adapted from Google Image)

According to Figure 4.2 Rook contiguity shares common borders. The Bishop contiguity shares

common corners and King or Queen contiguity shares both common corners and common borders. In

general, the contiguity weight matrices determine the point of interaction between two adjacent areas.

For example, in Rook contiguity all the interactions happen through the borders. However, for the

distance based weight matrices, the interaction happens in a spatially delineated manner within a

boundary of information that affects each individual observation (for example, the boundary for the

particular property market could be its geographical submarket).

The structure of distance based weight matrix is categorised into three main types. They are k-nearest

neighbours, inverse distance and distance decay function. Analogous to the contiguity matrix

properties, the interaction can be generated through the neighbourhood/adjacency or as a function of

distance. For the k-nearest neighbours, there is a threshold level of neighbours that could affect the

characteristics of a particular location (observation) as well as determining the impact from

neighbours. Four neighbours are commonly taken as the rule of thumb. Figure 4.3 shows the general

102
representation of neighbours in a diagonal zero symmetric weight matrix. In Figure 4.3, N represents

the number of adjacent neighbours. The nearest neighbours are represented by 1.

N 1 2 3 4 5 6 7 8 9 10
1 0 1 0 1 0 0 0 0 0 0
2 1 0 0 0 1 0 0 0 0 0
3 0 0 0 1 0 0 1 0 0 0
4 1 0 1 0 1 0 0 1 0 0
5 0 1 0 1 0 1 0 0 1 0
6 0 0 0 0 1 0 0 0 0 1
7 0 0 1 0 0 0 0 1 0 0
8 0 0 0 1 0 0 1 0 1 0
9 0 0 0 0 1 0 0 1 0 1
10 0 0 0 0 0 1 0 0 1 0
Figure 4.3: Binary symmetric spatial weight matrix (Compiled by Author)

In Figure 4.3, ten locations have been considered and neighbours are denoted by number one. For

example, location one has two neighbours. They are locations 2 and 4. This is similar to the contiguity

weight matrix where it shares common characteristics. In the case of distance based weight matrix, it

shares common characteristics in ‘neighbourhood’ through spatial closeness measured in distance

while in the case of contiguity weight matrix common characteristics are shared through borders or

adjacency. The distance decay accounts for the most significant impact on a particular location where

the distance increases and the impact diminishes as indicated by Tobler's law.

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Figure 4.4: The variation of weights with normalised distance (Compiled by Author)

The inverse distance method solves this by giving a higher weight for the closest locations. Figure 4.4

illustrates the weighting distribution of an inverse distance matrix.

The normalised distance is the row standardised distance between neighbours. Hence, it sums to unity

(1). This will help in estimating spatial models and in defining the range for spatial dependence

parameters ( ). For interpretation purposes, they are supposed to be within the 0 – 1 range. The

other important properties of the spatial weight matrix are symmetry and diagonal zero. The weight

104
matrix in spatial analysis needs to be symmetric in order to include all observations under

consideration in a defined boundary (distance band). For example, if we assume that and are the

most distant neighbours in a given boundary, the weight matrix needs to be symmetric to show the

distance between both of and and also to show the zero effect of self-neighbouring. It then

defines the trace of the matrix as zero. This is a significant and important property of a spatial weight

matrix.

The importance of the elements of the weight matrix depends on whether they are ‘adjacency based’

or ‘distance based’. This is because it determines the localised effect of a global spatial effect

(Moran’s I). Hence, it helps to finalise the level of spatial homogeneity where clustering patterns

provide an explicable meaning to a spatial distribution (or spatial dependence) or spatial heterogeneity

(mean variation by each location) which provides inconclusive observations for spatial dependence

(vast geographical variation of observations where means are different for each location). Therefore,

according to past studies (see, for example, Anselin, 1988; Baddeley, 2010) clustering patterns lead to

positive spatial dependence. Hence, neighbours determine everything in geospatial analysis such as

geoeconomy, geoeducation and geopolitics. However it is essential to finalise and decide how each

one become neighbours to one another and identify the underlying interaction between them. This then

creates the concept of spatial dependence.

Therefore, it is important to decide whether contiguity based or distance based spatial patterns are to

be employed. While contiguity based patterns are much more suitable for large scale analysis (for

example, interstate analysis in USA), distance based patterns are more suitable for small-scale analysis

(for example, suburb level analysis). Hence, for this study distance based analysis is used. It is noted

however that in distance based analysis there is no proper agreement in the literature as to what

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distance measures to be used. Distance based analysis consists of two coordinate systems namely

Geographical and Cartesian which are spherical-globe and flat-planner distances respectively.

Geographical coordinates locate a point in the globe by latitude and longitude where negative values

are applicable below the equator and left to the prime meridian. The geographical coordinates are

therefore applicable to a sphere. The Cartesian coordinates are applicable to a flat plain and only

possess positive values along the X, Y axes. However, the earth is not a perfect globe or a flat plain.

And it is important to depict the reality as it is. Therefore Cartesian coordinates are chosen given they

are far more suitable to explain the interaction of point patterns in a particular location in the earth

compared to geographical coordinates. Figures 4.5 and 4.6 explain the Geographical space and the

Cartesian space. The Geographical coordinates cover the spherical space over the earth and Cartesian

coordinates are projected over a small discrete surface.

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Figure 4.5: Components of geographic coordinates system (Compiled by Author)

Figure 4.5 shows the Cartesian coordinate system that helps to determine the interactions between

objects in a linear manner. The Cartesian coordinate system is a simplification of the geographical

coordinate system and is used to illustrate the spatial distribution of objects of interest in a relatively

small space. Also it only represents the positive area of the geographical coordinates system which is

shaded in Figure 4.5. Therefore, it is the top right quarter of the geographic coordinates system. Hence

conversion of negative geographic coordinates to positive values is necessary to conform to the

Cartesian coordinates system in order to achieve this prime meridian (which is latitude line) and the

equator (which is longitude line) which contain only positive values.

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Figure 4.6: Components of Cartesian coordinates system (Compiled by Author)

Therefore, the geographical coordinates obtained by iTouchMap are converted into Cartesian

coordinates to obtain accurate results and are renamed projected coordinates.

Thus decisions or conclusions we draw about space are entirely dependent on the coordinate system

we use and the selection of an accurate coordinate system for the space in this study can determine the

accuracy of the results and conclusions (Einstein, 1952). Hence, the potential differences in the

coefficients in the latter analyses in this chapter are due to the differences in the coordinate systems.

The boundary of spatial pattern now depends on the maximum distance band or the Euclidean distance

between the most distant points which can be extracted using Pythagoras theorem. In this way the

Cartesian or Euclidean space defines a linear association between spatial objects in a small localised

space.

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4.4 IMPORTANT FEATURES OF SPATIAL WEIGHT MATRICES

Figure 4.7 shows the structure of the contiguity weight matrix. It defines the adjacent neighbours and
avoids self-selection.

4.4.1 CONTIGUITY WEIGHT MATRIX

0 1 1 1

1 0 1 1

1 1 0 1

1 1 1 0

Figure 4.7: Contiguity Matrix (Matrix 1) (Compiled by Author)

4.4.2 ROW STANDARDISED CONTIGUITY WEIGHT MATRIX

Figure 4.8 shows the row standardised contiguity based weight matrix for ease of explanation. The

adjacency is weighted by the number of neighbours.

0 1/3 1/3 1/3

1/3 0 1/3 1/3

1/3 1/3 0 1/3

1/3 1/3 1/3 0

Figure 4.8: Row standardised or row stochastic contiguity matrix (Matrix 2) (Compiled by Author)

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4.4.3 DIRECT DISTANCE BASED WEIGHT MATRIX WITH NO DISTANCE DECAY

Similar to Figure 4.7, a distance based weight matrix can be developed for spatial weights as shown in

Figure 4.9.

Figure 4.9: Direct distance based matrix (Matrix 3) (Compiled by Author)

4.4.4 DIRECT DISTANCE BASED WEIGHT MATRIX WITH DISTANCE

DECAY

Figure 4.10 shows the inverse distance based weight matrix before row standardisation. This is the

most meaningful distance relationship for this study since the effects of externalities reduce with

distance.

0 1/ 1/ 1/

1/ 0 1/ 1/

1/ 1/ 0 1/

1/ 1/ 1/ 0

Figure 4.10: Inverse distance based matrix (Matrix 4) (Compiled by Author)

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4.5 CONTRAST BETWEEN EUCLIDEAN DISTANCE AND
GEOGRAPHICAL COORDINATE PROCESSES

It is commonly accepted that the Euclidean distance is more suited for a flat plane. It is described as a

‘flat-planner’. It is the distance component, , in Matrix 3 and Matrix 4 and is the shortest distance

between two points in a flat plane depicted in the diagonal of a right triangle. This concept best fits

when determining the neighbourhood of spatially distributed adjacent objects or patterns. It better

describes the meaning behind the pattern compared to the geographical coordinate system which is

applied to globular structures. Hence, the geographical coordinates can be described as a “spherical-

globe” and provide less meaningful results for localised effects on spatial neighbourhoods. More

simply, the patterns of interstate GDP distribution are not on par with spatial point patterns of house

prices. Similarly, geographical/arc distance is not same to the Euclidian distance. Therefore, more

efficient estimates can be obtained from spatial analysis for ‘point’ distributions if we use the

Euclidean distance rather than a geographical distance.

4.6 DATA COLLECTION METHOD

The real estate data which includes information on sales prices, as well as structural information about

the house and lot size were obtained from RP Data (RP Data, 2012). RP data is the most widely used

database for real estate information, in Australia. This data was doubled checked for accuracy using

another real estate database called Oldlistings (The complementary information for the RP Data was

also obtained from the Oldlistings database) (Oldlistings, 2012). RP data is subscription-based, while

Oldlistings can be accessed free of charge. All properties which were one acre in size or less were

included in the sample (Provencher et al., 2008). RP and Oldlistings databases provide all property

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transactions made over the last two decades and information on house prices and structural

characteristics of all properties sold. Photographs and street names are also included.

Google Maps (2012) were used to locate the properties in the geographic space. An important feature

in Google Maps is that it provides direct distance and driving distance measurements that can be used

to improve the data set and show the different types of spatial interactions. Furthermore, it is useful to

illustrate spatial point patterns which can be augmented with Google Earth maps.

The collection of geographical coordinates for a given address is based on a Google Map and were

collected from the online database iTouchMap (2012). Hence, the method of collecting and projecting

and then developing spatial point patterns do not require advanced software such as ArcGIS and is a

simpler and a cost effective approach. Moreover the projection of geographical coordinates can be

undertaken using standard conversion algorithms which use the radius of the earth as a measure.

The socio-economic variables such as monthly median income, ethnic composition and monthly loan

repayments were accessed from the Australian Bureau of Statistics (ABS, 2011).

This approach makes it possible to conduct research when the required data are difficult to obtain or

are costly. Interestingly most spatial hedonic studies are US based which is partly due to the

availability of relevant databases and ease of access to them. In countries such as Australia similar

databases are not easily obtained and where available are expensive to purchase.

The calculation of projected coordinates is essential for the Euclidian distance process for which the

standard transformation algorithms are used. As mentioned in section 4.3, it converts geographical into

Euclidian coordinates.

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4.7 SPATIAL AUTOCORRELATION

Spatial autocorrelation is an econometric issue faced by researchers when analysing spatially

dependent data. Housing prices are conventionally believed to be clustered according to the underlying

socio-economic conditions. Hence, in such situations it is likely for spatial autocorrelation to occur

(Samarasinghe and Sharp, 2010). In this study detection and correction of spatial autocorrelation is

achieved by specifying the correct functional form. According to Anselin (1988), the prices of

properties which share neighbourhood characteristics and socio-economic characteristics are not

determined only by the characteristics they have, but by the effect of characteristics of neighbouring

properties. In the presence of spatial autocorrelation, the error term of the hedonic function is spatially

correlated and the estimated coefficients are not efficient. Hence, to obtain efficient estimates, Spatial

Lag and Spatial Error models have to be estimated. The most suitable model used is based on test

statistics (Mallios et al., 2009). The spatial models are discussed in Section 4.9.1.

4.7.1 SPATIAL LAG MODEL

= + + (4.1)

( − ) = + (4.2)

=( − ) +( − ) (4.3)

In the above model, is the property price and is an × 1 column vector. is an × matrix of

explanatory variables. is the row standardised diagonal zero symmetric spatial weight matrix that

accounts for spatial autocorrelation and is the spatially lagged dependent variable. is an N× 1

column vector of coefficients and is the spatially correlated error term. The uncorrelated white noise

error term is ( ~ (0 , )).

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4.7.2 MAXIMUM LIKELIHOOD ESTIMATION

The spatial lag equation can be re-written as follows:

( − ) = + (4.4)

= + (4.5)

This model is commonly estimated by maximum likelihood. However, this is different from the

general likelihood estimation. In the general likelihood estimation, the likelihood cannot be built by

using observation and assuming independence or uncorrelatedness. In the presence of spatial

autocorrelation it is necessary to use joint distribution of data (Anselin, 2009).

The log-likelihood function can be written as follows:

In ( , , ) = − ln − ln + ln| | − ( − ) ( − ) (4.6)

where | | is the determinant of . The ML estimator of can be given as follows.

= ( ) (4.7)

= ( ) − ( )

= −

where =( ) and = ( ) . is the coefficient vector of the OLS regression

of on . is the coefficient vector from the spatial lag model.

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The steps in estimation are as follows:

1. Regress on which yields the vector, . The residual vector is = −

2. Regress on which yields the . The residual vector is = − .

3. Solve for that maximises a concentrated log-likelihood function ( )which is given below.

∗
ln = − ln[( ) ( − )( − )] + ln | | (4.8)

4. Knowing , solve for = − and =( ) ( − )( − ).

4.7.3 SPATIAL ERROR MODEL

= + (4.9)

= λWu + ν (4.10)

where is the white noise error term.

Hence:

( − λ ) = (4.11)

=( −λ ) (4.12)

So the model to be estimated is:

= +( −λ ) (4.13)

where and λ are assumed to be between -1 and +1. In this case +1 implies strong spatial

autocorrelation (spatial dependence) of property prices or clustering of similar property prices. The

scalar -1 implies clustering of dissimilar property prices which does not have a clear economic

explanation in the literature.

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4.7.4 MAXIMUM LIKELIHOOD ESTIMATION

In this case, ML estimation goes with the residual vector of OLS regression and the transformation of

it to the classical error vector. Hence, the error term is correlated and the non-constant error variance

generates heteroskedastic disturbance. To estimate the efficient vector of , the genaralised least

square (GLS) approach has to be followed.

=( − ) (4.14)

Hence: ( )= (4.15)

So that: = + (4.16)

= (4.17)

=( − )

The corresponding log-likelihood function is:

1
ln = − ln − ln + ln | | − ( − ) ( − ) (4.18)
2 2 2

The concentrated log-likelihood function is:

∗ ||
ln = − ln + ln || − (4.19)

where = − . The dependence of on , can be solved by the iterative

estimation process given below.

1. Regress on . The coefficient vector is . Solve for the residual vector = − .

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2. Estimate the concentrated log-likelihood using this that yields the .

3. Estimate the residual vector = − using GLS estimator that uses .

4. If the residuals have not converged, follow the step 2 and re-estimate . Otherwise go to step 5.

5. Having the converged estimate of ( ) and the residual vector , and a GLS estimator, . is

estimated using ( ) .

4.7.5 SPATIAL MIXED MODEL

The spatial mixed model jointly estimates the spatial lag and spatial error models simultaneously

according to the algorithms provided above.

= + + , ℎ = + (4.20)

In Equation (4.20), and are identical.

4.7.6 SPATIAL MODEL SELECTION CRITERIA

Model selection in hedonic spatial analysis starts with the diagnostic tests for global spatial

autocorrelation. This notion was first introduced by the Australian statistician Patrick Moran (1950b).

It is essential to examine for global spatial autocorrelation in order to conduct further analysis in

spatial analysis. Moran’s I statistic provides proof of correlation among signals or information sets

across space. These information sets can be property prices, crime rates, GDP in states and spreading

patterns of diseases. Spatial correlation among these observations violates the standard ordinary least

square assumptions. That is given the error terms are correlated and estimators are no longer efficient

they become biased. Equations (4.21) and (4.22) provide the mathematical descriptions for Moran’s I.

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If a random draw from a sample which is spatially distributed and is spatially autocorrelated, they

have the relationship shown in Equation (4.22):

, = , − ( ) ≠0 (4.21)

Hence, according to Equation (4.22), Moran’s I statistic is used to provide proof of spatial dependence

which takes into account the level of spatial clustering or dispersion patterns. Moran’s I statistic ranges

between -1 to +1 where -1 implies extreme negative spatial autocorrelation (aggregation of dissimilar

prices) and +1 implies extreme positive spatial autocorrelation (clustering of similar prices). Moran’s I

is calculated using property prices and for this study it shows there is significant spatial dependence in

property prices.

∑ ∑ ( )( )
= (4.22)
(∑ ( − ) (∑ ∑ )

Synonymously:

∗
∑ ∑ . .
= (4.23)
∑

where = : =

Moran’s I has the expectation:

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 ( )= (4.24)

In Equation (4.22), is the property price and is its mean value. is the spatial weight matrix that

is row standardised.

The presence of global spatial dependence is the trigger for the Lagrange multiplier (LM) test. The

LM test uses OLS residuals to detect the presence of spatial lag or error dependence. The most

commonly used LM tests (Anselin, 1988; Burridge, 1980) is described in Equations (4.25) and (4.26).

These tests are defined for the spatial error process ( ) and for the spatial lag process ( ):

= ( ) (4.25)

( )
= (4.26)

2
where = 2 [( ) + : = − ( )

In Equations (4.25) and (4.26): and are the spatial error and spatial lag parameters respectively

which take values <1. These LM tests assume normality of the error terms which is a necessary and

sufficient condition in the LM test. To remedy this problem, Kelejian and Robinson (1993) proposed

another method that does not require the condition of normality of error terms. The model in Equation

(4.27) shows the KR statistic (Kelejian-Robinson).

= (4.27)

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The KR statistic comes from an auxiliary regression of cross products of residuals and cross products

of explanatory variables (Matrix Z). The cross products are produced by pairs of observations which

show non-zero correlation. Total pairs are indicated by hN. γ is the coefficient vector from the

auxiliary regression and is the resulting residual vector.

The selection criteria after calculating the LM statistic depends on the significance levels of each LM

criterion in the test. They are LM-error, LM-error robust, LM-lag and LM-lag robust. One of these

criteria should be significant to estimate the corresponding spatial models otherwise the OLS

estimation is accepted as the most efficient estimator.

There are other alternatives available when analysing geographically distributed data such as

Geographically Weighted Regressions (GWR). These regressions provide reasonable estimators for

spatial analysis where the ML method produces theoretical and estimation limitations. Because there

are some restrictions in ML estimation as in the case of the LM test, the sample size should be large

(normally 200+ observations). For the spatial lag and error estimation there is a generally accepted

upper limit for the sample size (normally it is around 1500 observations) although there are cases

where 3000 observations have been used with GeoDa. However, these analyses cannot be performed

with the computation facilities available for the average researcher.

4.8 COMPARISON OF THE USE OF PROJECTED COORDINATES

AND GEOGRAPHIC COORDINATES FOR SPATIAL ANALYSIS

4.8.1 RESULTS AND DISCUSSION

A comparison of projected and geographic coordinates results are undertaken to demonstrate that

estimates from projected (Euclidean) coordinates are superior. Two studies are used for this purpose

which examine (1) the impact of mining and smelting activities on property prices: Mount Isa city,
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Queensland, Australia: (2) the impact of an announcement of a proposed quarry road on property

prices. The first is a published journal article and the second is a submitted manuscript. Only the

spatial results are reported in this section. The papers are attached as an appendix to the thesis. Spatial

Error and Spatial Lag models which are discussed in section 4.9 are used for the analyses. In the first

and the second analyses there is a clear difference between the coefficients and the model selection

criteria. For example, in the first analysis (Table 4.3) the coefficient of the distance to the mining and

smelting sites is 0.067 while in the second analysis (Table 4.4) the coefficient is 0.030. The other

variables show a similar type of variation between the two methods. According to the model selection

criteria (i.e. using the Wald and LR tests), the most robust estimates are obtained from the projected

coordinate analysis for both studies mentioned above. Tables 4.1 and 4.2 show the variables used in

the analysis in the two studies.

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Table 4.1: Definition of variables for Mount Isa analysis
Variable Description Expected
BD Number of bedrooms +
BTH Number of bathrooms +
CARPORT Number of carports +
LOGSCHOOL Log distance to the nearest state school(km) -
LOGSUPERMAR Log distance to the nearest Coles supermarket(km) -
PARK Distance to the nearest recreational park(km) -
DISTANCE Distance to the mining and smelting sites +
LOGSIZE Log size of the land (sq. metres) +
MHI Median household income (AUS$/week) +
D_2004 Dummy: 1 if year of sale is 2004 and 0 otherwise +/-
D_2005 Dummy: 1 if year of sale is 2005 and 0 otherwise +
D_2006 Dummy: 1 if year of sale is 2006 and 0 otherwise +
D_2007 Dummy: 1 if year of sale is 2007 and 0 otherwise +
D_2008 Dummy: 1 if year of sale is 2008 and 0 otherwise +
D_2009 Dummy: 1 if year of sale is 2009 and 0 otherwise +
D_2010 Dummy: 1 if year of sale is 2010 and 0 otherwise +

The variables used for the Kholo and the Mount Isa study show similarities in capturing negative spill-

overs. In both studies the distance variable is used to examine the impact of the negative externality.

Furthermore, the distance to amenities such as recreational park and public amenities (such as

supermarkets and schools) were used as control variables in both the models. The variables used cover

structural, neighbourhood, environmental, socio-economic and temporal factors that affect house

prices. The year variables used in both cases show price fluctuations.

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Table 4.2: Variables used for Kholo study
Variable Description Expected
Consumer price index Property prices adjusted for inflation N/A
AGE Age of house [have used architectural +/-
BTH Number of bathrooms +
BD Number of bedrooms +
CARPORT Presence of a carport/garage (1: yes, +
LOGSIZE Log of the size of the land (Square +
meters)
DIPS Distance to Ipswich (km) +
DISTANCE Distance to the KHR (km) +
MHI Monthly median household income (Aus $) +
MLP Monthly loan repayment (AUS$) -
PARK Distance to the nearest park (km) -
SCHOOL Log of the distance to the school (km) -
SUPERM Log of the distance to the supermarket (km) -

YR2003 1: if year of sale = 2003, otherwise: 0 +

YR2004 1: if year of sale = 2004, otherwise: 0 +

YR2005 1: if year of sale = 2005, otherwise: 0 +

YR2006 1: if year of sale = 2006, otherwise: 0 +

YR2007 1: if year of sale = 2007, otherwise: 0 +

YR2008 1: if year of sale = 2008, otherwise: 0 +

YR2009 1: if year of sale = 2009, otherwise: 0 +

YR2010 1: if year of sale = 2010, otherwise: 0 +

Tables 4.3 and 4.4 show the results of the spatial regression for the Mount Isa study. It is clear that the

coefficients of the models are significantly different given the two coordinate systems used for the two
123
analyses. As discussed in Section 4.4, the most accurate coordinate system is the projected or the

Euclidean coordinate system which produces more robust results.

Table 4.3: Mount Isa spatial regression results with projected coordinates
Variables SEM SAR
Coefficient t-Value Coefficient t-Value
BD 0.075*** 3.82 0.074*** 3.82
CARPORT 0.031** 2.27 0.032*** 2.35
BTH 0.160*** 4.78 0.165*** 4.99
DISTANCE 0.067*** 3.19 0.062*** 3.23
LOGSCHOOL 0.077 0.91 0.072 0.9
LOGSUPERMAR -0.019 -0.36 -0.011 -0.22
PARK -0.128* -1.79 -0.123* -1.82
LOGSIZE 0.626** 3.78 0.603*** 3.86
MHI 4.05E-05 0.54 2.73E-05 0.39
D_2004 -0.003 -0.06 -0.017 -0.31
D_2005 0.320*** 6.38 0.312*** 6.28
D_2006 0.591*** 11.17 0.587*** 11.19
D_2007 0.914*** 18.28 0.904*** 18.33
D_2008 0.962*** 17.34 0.953*** 17.3
D_2009 0.845*** 15.86 0.835*** 15.85
D_2010 0.847*** 15.71 0.841*** 15.76
R2 N/A N/A
Ajd. R2 N/A N/A
Moran’s I -0.007 -0.219
Lambda/Rho 0.09 1.11 0.11*** 2.68
2
WaldTest(rho=0)Chi 1.22 (0.268) 7.18*** (0.00)
2
LR Test (rho=0)Chi 1.20 (0.271) 7.04***(0.00)
Note: The significance levels of ***, ** and * are respectively 1%, 5% and 10%

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Table 4.4: Mount Isa spatial regression results with geographic coordinates
Variables SEM SAR

Coefficient t-Value Coefficient t-Value

BD 0.035*** 4.44 0.034*** 4.48

CARPORT 0.013** 2.28 0.014** 2.45

BTH 0.055*** 4.61 0.052*** 4.55

DISTANCE 0.030*** 3.54 0.028*** 3.4

LOGSCHOOL 0.037 1.07 0.042 1.23

LOGSUPERMAR -0.008 -0.38 -0.007 -0.36

PARK -0.052* -1.75 -0.053* -1.82

LOGSIZE 0.296*** 4.14 0.279*** 4.06

MHIWK 1.04E-05 0.34 2.68E-07 0.01

D_2004 0.022 0.94 0.019 0.81

D_2005 0.172*** 7.88 0.169*** 7.86

D_2006 0.307*** 13.32 0.305*** 13.39

D_2007 0.465*** 21.43 0.460*** 21.44

D_2008 0.502*** 20.74 0.499*** 20.83

D_2009 0.467*** 20.29 0.460*** 20.19

D_2010 0.477*** 20.34 0.476*** 20.54

R2 N/A N/A

Lambda/Rho 0.024 0.25 0.121** 2.53

WaldTest(lambda/rho=0)Chi2 0.63 0.802 6.421*** 0.011
LR Test (lambda/rho=0)Chi 2 0.63 0.802 6.302*** 0.012
Note: The significance levels of ***, ** and * are respectively 1%, 5% and 10%

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Tables 4.5 and 4.6 show the results for the Kholo analysis using Euclidean (projected) and geographic

coordinates respectively. As discussed in the Mount Isa spatial analysis, the coefficients are

significantly different in the two models. For example, the DISTANCE variable has an AUS$ 1033

difference. This is a significant welfare effect and has policy implications. Other variables, too, have

different coefficient values in the models.

Table 4.5: Results of Kholo study for the spatial mixed model with projected coordinates
Variables Spatial Mixed Model
Coefficient t-Value
AGE -116.644 -0.500
BTH 39122.970**** 4.950
BD 20240.950**** 3.510
CARPORT -3658.100 -0.640
DIPS 21367.560**** 3.590
DISTANCE 14246.480*** 2.370
LOGSIZE 83535.170**** 4.500
MHI -33.639 -0.890
MHI2 0.004 0.830
PARK 4924.529 0.970
RIVER 6373.134 0.820
SCHOOL -5875.448 -0.900
SUPERM -9879.394*** -2.550
YR2003 -74914.230** -2.090
YR2004 99505.980**** 2.910
YR2005 84859.630**** 3.200
YR2006 114658.400**** 4.550
YR2007 158648.800**** 7.200
YR2008 168494.500**** 7.720
YR2009 137837.400**** 6.300
YR2010 201865.200**** 5.520
Lambda / Rho -0.23*/0.163* -1.76/1.84
R2 N/A N/A
Wald Test SAC Vs. OLS 4.597*
LR Test SAC Vs. OLS 3.979
Note: **** Significant under 1%, *** Significant under 2%, ** Significant under 5%, * Significant
under 10%.

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Table 4.6: Results of Kholo study for the spatial mixed model with geographic coordinates
Spatial Mixed Model
Coefficient t-Value
AGE -102.9782 -0.44
BTH 37833.09**** 4.74
BD 20086.08**** 3.45
CARPORT -4459.359 -0.77
DIPS 21189.85**** 3.49
DISTANCE 13213.04*** 2.16
LOGSIZE 82988.31**** 4.45
MHI -42.44973 -1.09
MHI2 0.004938 1.05
PARK 5333.969 1.03
RIVER 5366.278 0.68
SCHOOL -6537.614 -0.99
SUPERM -9106.864*** -2.33
YR2003 -75749.14** -2.08
YR2004 106669.8**** 3.1
YR2005 84983.96**** 3.17
YR2006 113518.2**** 4.44
YR2007 157098.2**** 7.05
YR2008 168384.8**** 7.6
YR2009 137788.7**** 6.2
YR2010 206336.8**** 5.54

Lambda / Rho -.139/.071 0.69/ -0.96

R2 N/A N/A
Wald Test SAC Vs. OLS 0.925 0.630
LR Test SAC Vs. OLS 0.907 0.636
Note: **** Significant under 1%, *** Significant under 2%, ** Significant under 5%,* Significant
under 10%.
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4.9 CHAPTER SUMMARY

In this chapter a new method of analysing spatial hedonic models is introduced. This is because in

previous studies the method of estimation and choice between the coordinate systems were not clearly

specified/ justified. For spatial models these issues are of crucial importance given an analysis

conducted with the wrong coordinate system generates inefficient and inconsistent estimates and

therefore incorrect outcomes. In some studies the model specification (e.g. where the two stage least

squares method of analysis has been used) is found not to be appropriate for the nominated objective.

Hence in this analysis all key issues are rigorously analysed with a view to choosing the correct

method of analysis.

A further important factor discussed in this chapter is the choice made between types of spatial weight

matrix on which the outcome of the spatial analysis is dependent.

Several functional forms of the spatial model were tested in order to select the best form for a given

set of data. Before deciding on the available functional forms, the spatial models were tested using

computer software such as MATLAB, GeoDa and ArcGIS. None of this software provided practically

feasible solutions. Therefore, an alternative method was used with freely available data sources

(except RP Data) and Stata software. This method provided an easier way to analyse hedonic spatial

models demanding the least amount of technical skill as well as increasing the capacity to use different

available models. In this way the adopted methodology provides greater opportunity to avoid the use

of costly and ‘expertise knowledge needed’ methods such as ArcGIS. The quality of the results also

allowed for more meaningful and reliable policy formulation.

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CHAPTER FIVE

FIELD SURVEY AND SECONDARY DATA COLLECTION

5.0 INTRODUCTION

This study is in the form of a field survey of residents living adjacent to two selected road corridors as

specified under the WBTN scheme and which is used to test property buyers’ current and previous

information levels. The primary data are essential to analyse buyers’ awareness of the road corridors

and to examine their satisfaction levels of living in the locality.

The main objective of this chapter is to test the marginal effects of the buyers’ knowledge of the

proposed corridors on the price of the properties. In previous chapters, the marginal effect of the

distance to dis-amenities was tested using two studies (Kholo study and Mount Isa study). The effect

of WBTN is tested in Chapter Six. The data are collected at an individual level allowing analysis of

the socio-economic characteristics of the surveyed population. Hence, the survey provides background

information about the decision making criteria of the householders in the area, and the data which are

not available in online databases.

This field survey also helps to test consumers’ response to the knowledge of the quality of the

environment arising from the spill-over effects of the announcement of the WBTN scheme. It is

widely believed in the economic literature that rational consumers use all available information when

they make purchasing decisions including houses. The literature on the economics of awareness and

economics of attention show that buyers’ level of awareness of accessible information plays a

significant role in decision making rather than information availability.

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The survey was conducted with three aims in mind: to analyse residents’ awareness of the WBTN road

expansions, to examine the satisfaction levels of buyers currently living in the area and to examine the

buyers’ information levels about the WBTN scheme at the time of purchasing the property. The

outcomes are intended to show whether there is depreciation (appreciation) of prices with the increase

of awareness (unawareness). It is this impact which is captured by the HP analysis. The welfare effects

produced can therefore be analysed further using the individual information derived from the survey.

This chapter has four sections. In the first sampling methodology and data collection are described.

The types of data required for Chapters Six and Seven, the way they have been collected and their

sources are discussed. Section two outlines the methodology of secondary data collection and Section

three provides methods of primary data collection. In the final section, the findings of the chapter are

summarised.

The chapter’s description of the data collection and survey procedures provide the information needed

to meet objectives four and five and research questions, five and six. It assimilates the information

needed for the discussion of outcomes in Chapter Six and Chapter Seven.

5.1 SAMPLING AND DATA COLLECTION

The sample selection approach consists of two ways of collecting the data required for this study. The

data required are secondary (Chapter Six) and primary data (Chapter Seven). As a general rule,

hedonic analysis requires as much data as possible in order to improve the accuracy of the coefficients

estimated and to fulfil the asymptotic requirements. Furthermore, the data collection process for

hedonic analysis is bounded by a clear market specification (sub-sample criteria which are to be

treated carefully during data collection). In particular HP analysis requires the exclusion of non-

relevant data to improve the consistency of the dataset.

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For the field survey a non-probability sampling technique called judgemental sampling is used.

According to the literature, it is the only available sampling technique that satisfies the conditions

related to the case studied in this thesis (Westfall, 2009). In most previous hedonic analyses the most

effective geographic area of interest consisting of the affected population was selected (Palmquist,

1992; Pope, 2008). A general rule in hedonic analysis is the assumption that when the number of data

points (observations) increases the accuracy of the analysis also increases. With this in mind all

available data were collected from the two proposed corridors selected for this study and the control

site. No primary data was collected from the control site. In the next two sections the method of

collecting of secondary and primary data are discussed.

5.2 SECONDARY DATA COLLECTION

The secondary data collection was undertaken using two databases (RP data and Oldlistings) to obtain

the structural characteristics of properties (e.g. number of bedrooms, number of bathrooms) as well as

the price of the property (house). This was based on the geographic locations of the study sites

identified using Google Maps reflecting the fact that in real estate data analysis, location is the most

important factor. Data for several suburbs were obtained for the study and control sites. The corridors

covered by the study sites are Everton Park to Kedron and the Everton Park to Albany Creek corridors.

The suburbs in the Everton Park to Kedron corridor option are Everton Park, Stafford, Alderley,

Grange, Gordon Park and Stafford Heights. The suburbs in the Everton Park to Albany Creek corridor

option are Everton Park, Albany Creek, Everton Hills and McDowall. These two corridor options

belong to the same submarket and therefore this does not violate the hedonic sampling assumptions.

To meet the assumption of a submarket and to obtain most relevant observations, the secondary data

were collected within the most effective 5 km distance band from the road corridors. The suburbs

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covered for the control site are Camp Hill, Coorparoo, Carina Heights and Carindale which are located

alongside Old Cleveland road. This control site was chosen because it has similar characteristics to the

study sites including the nature of the existing lanes and residential setting characteristics.

Furthermore, no major proposed improvements have been announced for this road corridor. Apart

from the above two databases, Google Maps and ABS (Australian Bureau of Statistics) data were

used. Google maps were used to estimate distances to dis-amenities (negative externalities), green

space and public amenities. ABS data were used to obtain socio-economic information for each

suburb. Information to create a before and after dummy was collected from WBTN project reports

(For example, Department of Transport and Main Roads, 2009). The age of the house was determined

by examining the architectural vintage from photos available on RP data and comparing it with

published architectural reports for Brisbane. In addition, iTouchMaps was used to obtain geographic

coordinates necessary for the spatial analysis. All databases, except RP data are freely available. The

addresses for all houses covered were collected from RP data and were used to conduct analyses in

Chapter Six and Chapter Seven.

5.3 PRIMARY DATA COLLECTION

In order to collect the primary data, a detailed questionnaire was developed. This is attached at

Appendices 1.0 and 1.1. Changes were carried out to the questionnaire to suit the needs of each of the

two corridors surveyed. As noted, all addresses were obtained from RP data using all available

addresses of properties sold since 1990 until 2012. A mailed questionnaire survey was used with a

postage pre-paid return envelope attached. As expected, a response rate of 17% was obtained. In order

to increase the response rate three prize draws, totalling AUS$ 2300 were offered. Follow-up

reminders were also used. Primary data collected included information on socio-economic and

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property characteristics which cannot be obtained from secondary data sources. Further details of the

questions are contained in Appendices 1.0 and 1.1.

5.4 SURVEY METHODOLOGY

As noted in Section 5.2 the survey covered nine suburbs which, based on information provided on the

WBTN scheme report, are likely to be affected by the announcements of the road corridor expansions.

The households selected were situated within a 5 km range from the two selected road corridors. Two

different questionnaires for the two road corridors were used due to the magnitude of the difference in

characteristics of the two corridors and the likely difference in impacts on the surrounding areas. The

sample size for the two corridors was 1200. The larger road corridor covering the area from Everton

Park to Albany Creek had 800 observations while the corridor from Everton Park to Kedron had 400

observations. It is important to distinguish the two corridors on the basis of type of the expansion. The

Everton Park to Albany Creek corridor is expected to include a rail line while the Everton Park to

Kedron corridor is intended to accommodate a bus lane. Each different transport forms can therefore

be expected to have different impact outcomes on the surrounding populations. The questionnaire used

for the survey was standardised according to QUT ethical clearance standards. The following steps

were followed to conduct the survey.

1. First draft of the questionnaire was prepared using the existing literature about the WBTN.

Much of the information about the demographic characteristics is available in the ABS. Also

information about the initial surveys and information campaign conducted by Department of

Transport and Main Roads were used to prepare the first draft of the questionnaire.

2. Then pre-testing of questionnaire was carried out with colleagues providing an assurance of

readability and easy conveyance of the messages. Following this peer review of the
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 questionnaire, changes were made including reducing the number of pages by trimming the

sentences and a raffle draw was included to improve the response rate. The questionnaire was

submitted to the QUT Ethical Clearance Committee for its approval. Further suggestion were

made and were included in the questionnaire such as the inclusion of possibly sensitive

questions that are age and level of income. As well a formal request letter was attached to the

questionnaire to inform the respondent about the ethical and legal aspects of the survey.

3. The survey was conducted in October, 2012. After one month follow-up postcards were sent as

reminders to increase the response rate.

4. At the end the raffle draw was done and winners were chosen. A thanking letter was sent to all

the participants including a letter to inform the outcome of the raffle draw.

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 SURVEY
EVERTON PARK TO EVERTON PARK TO
KEDRON ALBANY CREEK

GENERAL INFORMATION

SOURCES OF INFORMATION

SEARCHING BEHAVIOUR

LEVEL OF SATISFACTION

DEMOGRAPHIC INFORMATION

ETHNIC COMPOSITION

ADDITIONAL INFORMATION

LOCATIONAL ATTRIBUTES

Figure 5.1: Structure of the questionnaire (Compiled by Author)

Questionnaires from respondents were received until early December, 2012. A liaison officer was

appointed to manage queries from survey respondents. Postcard reminders were sent to residents who

had not responded to the questionnaire after two months of commencement of survey. This had a

positive impact on the response rate. According to the Table 5.1, the survey produced a 17% response

rate.

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Table 5.1: Survey responses
Description Number
Questionnaire mailed-out 1200
Total questionnaire received 201
Questionnaire discarded 28
Follow-up postcards mailed-out 500
Questionnaire received after postcard follow-up 10

The survey was based on Presser et al.’s methodology (2004). All relevant issues discussed in the

literature review in Chapter Three were taken into consideration when the questionnaire was

developed. The questionnaire pre-testing criteria discussed in Presser et al. was applied in the survey.

In order to reduce the complexity of questions and improve the readability questionnaires were

pretested with colleagues and necessary changes were made.

Transport corridor related amenities and dis-amenities are well described in the hedonic literature. As

shown in Figure 6.2. Kutz (2008) pointed out that there are several transport corridor related negative

externalities which affect nearby households and their quality of living. Therefore, several questions

were included to obtain the buyers’ response to the main negative externalities expected from the

proposed WBTN road corridor improvement project. According to Nelson (1982), distance from the

road corridor has a significant impact on living comfort of residents living close to road corridors.

Hence, the respondents were asked about the levels of noise and the visual dis-amenity they expected

to be generated by the corridor activities. Figure 5.1 shows the structure applied in the questionnaire.

The impact of noise disturbance from different transport related externalities was assessed before

preparing the questionnaire being an important factor with regard to the WBTN road corridor

expansions. For this purpose the study of Day et al. (2007) was used to identify welfare effects due to

136
changes in noise exposure using HP models. They underlined the importance of using information

provided by households’ choices of aversion to noise exposure given that it represents demand for

peace and quiet. These insights are used to investigate the buyers’ knowledge of the expected level of

noise disturbances.

The issue of noise annoyance levels is discussed in Shultz’s (1978) pioneering work. The ‘Shultz

curve’ indicates a non-linear relationship of noise level and annoyance which is closely related to

highway noise disturbance levels (Nelson, 1982). This is further discussed by Fidell (2003) where the

importance of measuring noise impacts as a dosage-effect helped policy makers such as U.S. Federal

Interagency Committee on Noise to arrive on annoyance based criteria to measure the thresholds of

noise.

We provided respondents all relevant information about the proposed WBTN road expansions and

asked for their prior level of knowledge about the transport corridors. In the first section of the

questionnaire respondents were also asked to provide their history of residence in the area as well as

their residential history prior to moving to the current location given its significant impact on the

current level of knowledge on the proposed corridor improvements. One of this study’s hypotheses is

that the source of information may have a significant impact on the level of awareness/knowledge of

the residents. Therefore several questions were included concerning the source of the information used

by residents to find the house they purchased and which they currently live-in. Responses to this

question are shown in Table 5.2.

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Table 5.2: Information sources used by buyers
Source of information Percentage
EPK EPAC
Word of mouth 4.76 3.12
Newspaper 2.38 2.34
Internet 16.69 7.03
Real-estate agent 30.95 42.96
Brisbane City Council 23.80 21.87
Other (lawyer, conveyance searches) 21.42 22.68

According to Table 5.2, most respondents used information provided by real-estate agents as their

most verified source. The second most verified source used is information provided by the Brisbane

City Council. There is a significant level of buyers who used other sources such as lawyers and

conveyance searches. Buyers have used information sources which increased verifiability as

hypothesised. Chapter Seven analyses the impact of these sources on the decision making process of

buyers.

First time buyers and out of area buyers were differentiated through questions which investigated the

type of buyer. Questions were also included relating to the number of searches buyers made before

purchasing the property and whether they received help from real estate agents to help capture buyers’

level of knowledge. In this way such questions provided a control for information effects where each

type of buyer contributes to the overall knowledge about road expansions. Table 5.3 shows the

responses to the level of knowledge about the WBTN scheme.

According to Table 5.3, there is a significant amount (81%) of respondents who were not aware or

were unsure of the corridor expansions. This situation clearly produces a considerable impact on the

level of information asymmetry in the selected property market with only 19% of the population being

138
subject to the benefits of information availability. This asymmetry was found to be present in both the

corridors under study.

Table 5.3: Levels of knowledge about the WBTN scheme

Respondents’ Previous Knowledge of Percentage
EPK EPAC
WBTN
Yes 11.97 13.70
No 79.0 83.87
Unsure 9.03 2.43

Table 5.4 shows the details of types of buyers in the surveyed areas indicating that most are repeat

buyers. It can therefore be assumed they have at least some level of experience of the housing services

they expect.

Table 5.4: Types of the buyer

Type of the buyer Percentage
EPK EPAC
First time 32.5 29.65
Repeat 65 65.11
Other 2.5 5.24

In this survey the information of buyers from the out-of-area and the same locality were collected. It

shows that most of the buyers are from out-of-area. The details are given in Table 5.5.

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Table 5.5: Origin of the buyer
Origin of the buyer Percentages
EPK EPAC
Out of area 78.5 79.5
Local 21.5 20.5

Buyers were asked to provide their level of knowledge about the proposed road corridor they live

close to. The descriptive results are shown in Table 5.6.

Table 5.6: Levels of knowledge about the proposed road corridors

Respondent’s Previous Knowledge of EPK Percentage
/ EPAC EPK EPAC
Nil 81.25 85.49
Low 9.38 11.45
Fair 9.37 3.06

According to Table 5.6, the respondents’ level of knowledge of the Everton Park to Kedron corridor

(EPK) is higher, although not greatly so, compared to the Everton Park to Albany Creek (EPAC)

corridor.

The satisfaction level of all the locational attributes was obtained through the survey using a likert

scale. The overall current satisfaction level of location characteristics was also obtained using an

ordered index. Under the ‘satisfaction level’ questions, respondents were asked to provide their

monthly mortgage payment within specified dollar ($) ranges. Table 5.7 shows the percentage within

each range.

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Table 5.7: Summary of mortgage payment
Category of mortgage payment (AUS$) / Percentage
EPK EPAC
fortnight
Less than 700 9.53 13.69
701-800 4.76 8.33
801-900 4.76 5.35
901-1000 0 4.16
1001-1100 4.76 7.17
More than 1100 47.6 29.76
Not revealed 28.59 31.54

According to Table 5.7, a substantial proportion of buyers paid more than AUS$ 1100 a week in

mortgage for their houses. This is a significant level given average income (see Table 5.8).

In the demographic information section, respondents were asked about their age and to provide their

level of education using an ordered scale from primary education to tertiary level. Weekly income

levels were obtained using an income range.

Table 5.8 shows the level of income of buyers for each category of incomes. The majority of dwellers

earned around AUS$ 2500-2999 per week. However, the income distribution varies considerably in

the two corridors. In EPK, a large proportion (60%) of residents earned between AUS$ 2500-2999

compared to 23% of EPAC residents. The proportion of respondents who earn less than AUS$ 2500-

2999 a week is higher in the EPAC corridor. Some residents are found to earn less than AUS$ 500 a

week with the largest percentage found in the EPAC corridor. Hence, in policy implementation it is

important to consider these highly differentiated levels of income since low income groups can be

subjected to a larger impact from corridor expansions compared to higher income groups.

141
Table 5.8: Levels of average household income in the two study sites
Level of income of buyers (AUS$) / week Percentage
EPK EPAC
Less than 500 5.71 8.13
500-999 5.71 9.88
1000-1499 0 16.86
1500-1999 2.85 12.20
2000-2499 5.71 16.27
2500-2999 60 23.30
3000-3499 5.71 6.97
More than 3499 14.31 6.39

Table 5.9 describes the age category of buyers. It is notable that the largest group of buyers were born

in the decade 1970-1979 with the second largest group of buyers in the 1960-1969 group. It can be

argued that decision making can be significantly influenced by age given the variation of tastes and

preferences attached to different age groups.

Table 5.9: Age category of buyers

Age category of buyers Percentage
EPK EPAC
Before 1929 2.85 1.26
1930-1939 0 2.53
1940-1949 8.57 8.86
1950-1959 0 13.92
1960-1969 17.23 22.78
1970-1979 51.4 44.30
1980-1989 17.1 6.35
After 1990 2.85 0

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Table 5.10 shows the level of education of buyers. The majority of buyers have an education level

above a Diploma. Hence, it is expected that with an increase in education level the awareness

regarding WBTN information increases. That is, education can be shown to increase buyers’

inclination to widen their search for correct sources.

Table 5.10: Education levels of buyers

Level of education Percentage
EPK EPAC
Primary only 0 1
Secondary schooling 5.55 15.51
Trade certificate 2.77 7.47
Diploma 22.25 16.66
University Degree 38.88 32.93
Postgraduate 30.55 26.43
Other 0 0

Table 5.11 shows that the percentage of male buyers is higher compared to females. The family

composition is also shown in Table 5.11. The percentage of young children who are less than 18 years

are higher in EPAC than EPK. On the other hand the proportion of those in the 18-65 age category is

similar between the two corridors surveyed.

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 Table 5.11: Gender and family composition7
Gender and family composition Percentage
EPK EPAC
Male 53.88 53.19
Female 46.12 46.81

Less than 18 years 13.70 18.88

18 years – 65 years 27.44 27.37
More than 65 years 58.86 53.75

The fact of whether a buyer is a migrant has relevance to the level of information possessed at the time

of purchasing the property and in the determination of the neighbourhood composition. The details are

given in Table 5.12. In the sample, 17% of respondents in the EPK said they were migrants compared

to 36.63% in EPAC. It can be hypothesised here that the level of knowledge of the proposed transport

corridor improvements is comparatively lower for migrants than for Australian born especially those

living in the vicinity of the affected areas.

Table 5.12: Status of migration

Migration status (yes /no question) Percentage
EPK EPAC
Yes 17.15 36.63
No 82.85 63.37

7
The percentages of the age categories in Table 5.11 are calculated from the numbers within the male and female gender
categories.

144
The questionnaire’s section relating to ethnic composition was designed to explore the type of

migration and how many friends/relatives of buyers live in the neighbourhood of their chosen housing

location. The questionnaire also sought the reasons for moving from their previous location.

The information about use of an agent was collected given it was important to find the effect of an

agent on buyers’ awareness. Table 5.13 provides the details about use of an agent in two corridors.

Table 5.13: Use of an agent

Use of an agent Percentage
EPK EPAC
Yes 48.7 58.8
No 51.3 41.2

In the additional information section, respondents were provided with a set of questions designed to

reveal the close neighbourhood attributes of the property. Participants were asked about unobstructed

views and about the presence of main roads near the house they currently live in. As the age of

properties is not provided in any database respondents were asked to provide this information.

Questions relating to parking facilities were also included in this section of the questionnaire.

5.5 CHAPTER SUMMARY

This chapter provides details about the data collection methodology and the types of data collected. In

previous studies only secondary data was collected for HP analysis. In this study we further enhance

the methodology by collecting individual data from a survey of the affected areas to better explain the

existence of information asymmetry and other issues which cannot be explained in conventional HP

analysis. This is considered to be an important contribution to the literature given few studies of this

nature are known to have been conducted.

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In carrying out an HP analysis secondary data relevant to the examination of the impact of

externalities on the property market was collected from various freely available databases (except RP

data). In addition this chapter describes how secondary data can be collected to undertake a HP

analysis for the purpose of examining the impact of proposed road corridors on affected areas.

The survey questionnaires were mailed out to all selected households in the two study sites. Contact

details were obtained from the secondary data collected for the HP analysis using Oldlistings database.

The survey response rate was 17%. It is slightly better than most studies of this nature which have

been conducted in Australia. The next chapter uses secondary data collected from various sources

discussed in this chapter to undertake a HP analysis to determine the impact of the announcement of

proposed road corridors on property prices. Chapter Seven uses data collected from the survey to

address asymmetric information and other issues discussed in Chapter One. Such an analysis can be

undertaken by using only primary data given secondary data for such a study is (in most cases)

unavailable.

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CHAPTER SIX

IMPACT OF WBTN ROAD CORRIDORS ON PROPERTY

PRICES: AN ANALYSIS OF EXISTING AND PROPOSED
CORRIDORS

6.0 INTRODUCTION

The intention of this chapter is to show the welfare effects on property owners from the announcement

of the proposed WBTN corridors. For this purpose, two corridors have been selected. As discussed in

the previous chapter, the analysis is undertaken using secondary data.

There is a well-established theoretical and empirical method for undertaking an HP analysis which

stems from Rosen’s work (Taylor, 2008). The theory behind the HP method are well documented (see,

for example, Anselin, 1988; Cropper et al., 1988; Freeman, 1993; Halvorsen and Pollakowski, 1981).

Furthermore, many empirical studies using the HP method have been used to demonstrate the impact

of environmental disamenities on property prices. Some of these studies include impacts on property

prices due to railroad construction (Decker and Flynn, 2007; Strand and Vågnes, 2001) and landfills

(Halstead et al., 1997). These studies have examined the spatial effects on property prices in relation to

externalities. This chapter’s extensive literature search reveals that there is a gap in research literature

on the impact on property prices due to announcements of major proposed projects with environmental

externalities and market uncertainties due to public opposition to such projects. This chapter,

therefore, attempts to address this gap by first (a) examining the impact of major road corridors on

property prices, and (b) extending the analysis to examine whether announcements of proposed major

projects affect nearby property prices.

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The proposed WBTN in Queensland provides an excellent opportunity to examine these two effects.

WBTN has been proposed to solve congestion problems arising from a rapidly growing population in

South East Queensland which relies largely on private vehicle use. The scheme involves, as outlined

in Chapter One, the construction of 22 road corridors of varying magnitudes (see, Department of

Transport and Main Roads, 2009).

In this chapter, the HP method is used to examine the impact of road corridors on property prices and,

using a dummy variable, investigates the potential effect of the magnitude of expansions. For this

purpose, two proposed road widening projects (corridors) which are part of the WBTN were selected.

They are the Everton Park to Kedron (EPK) and the Everton Park to Albany Creek (EPAC) road

corridors8. The proposed EPAC corridor is clearly larger than the proposed EPK corridor, and is

designed for the addition of a rail link and extra bus corridor on both sides of the Old Northern Road.

It is therefore hypothesised in this study that the larger proposed expansion will have a bigger impact

on property prices than the proposed smaller project9.

The chapter consists of eight sections, including the summary of findings. The first section provides a

brief introduction to the WBTN transport network and a focus on the two corridors selected for

analysis in this study. The introduction establishes the background to the literature review in Section

two which discusses important previous studies which support the findings of this chapter. The

literature review also provides the theoretical and empirical background for the chapter. Sections three

8
At present, roads in both corridors are of similar size, although in certain areas the Everton Park to Albany Creek road is
wider. The existing speed limit is 60km/hr for both corridors.
9
Another option to determine these effects would be to include a control area in the regression analysis which is given as
an additional clarification with the idea of “with and without” effect in Section six.

148
and four provide the analytical results, the data and the estimated models. In Section five, spatial

analysis is discussed. Section six discusses property price variations over time in the affected and non-

affected (control) sites, and addresses the fifth objective of the thesis and research questions, five and

six. The control site analysis is undertaken in Section seven. Section eight concludes with a discussion

of the main results and its policy implications.

6.1 WBTN PROJECT AND THE SELECTED ROAD CORRIDORS

South East Queensland, with a current population of approximately two million, has been attracting

nearly 55,000 residents a year over the past two decades (Department of Transport and Main Roads,

2009). If this trend continues, the forecast is for the population in the region to grow to approximately

four million by 2026 (Department of Transport and Main Roads, 2009). This is a significant increase

and is expected to generate five million new trips within the transport network each day. In turn, the

projected population expansion increases the need to upgrade and improve transport infrastructure.

According to Queensland Transport Services (QTS) (Department of Transport and Main Roads, 2009),

the growing population pressure has led to a sharp increase in private vehicle use, a rapid growth in

freight movements (adding to the worsening peak hour traffic congestion) and overcrowding of

passenger transport services.

The existing road corridors and the proposed new corridors as graphically illustrated in Figure 2.1, can

be expected to provide urban amenities as well as urban disamenities. This is an a priori expectation

tested by using the distance from the existing and proposed corridors as a proxy variable for these

amenities/disamenities.

The initial identification of the proposed WBTN corridors was undertaken nearly forty years ago.

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However, feasibility studies for these road corridors were not undertaken until the period 1996-2008.

Information about the WBTN corridors has been available to the public since 1996 and official

statements concerning implementation of the project were made in 2008. Community feedback

regarding the WBTN project has been sought and accumulated since 2004. The public, to a large

extent, have been aware of these proposed corridors (see Figure 2.1) and in more recent times,

considerable public discussion and debate have taken place regarding this issue (Department of

Transport and Main Roads, 2009).

As shown in Figure 2.1, the WBTN project involves the proposed construction of 22 corridors for new

highway developments, including improvements to existing road corridors. In this study, only two of

the proposed road corridors are considered, namely, the EPK and the EPAC.

In order to examine (a) the impact of major road corridors on property prices and (b) whether there is

an impact on property prices from the proposed announcements, the proposed EPK and the EPAC

corridors were selected. The different size of the expansion of the proposed two corridors enables us to

compare the impact on property prices of the announcement between a small and a large corridor (see

Figures 2.2 and 2.3 in Chapter Two). A further reason for this selection is that the current width of the

two road corridors are similar while the proposed expansions are different. In other words, the

proposed EPAC corridor extension is wider compared to the EPK corridor extension. These two

locations are situated in relatively densely populated areas.

The EPK is aimed at developing the existing road corridor into a single busway coupled with a tunnel

and a lane for cycling and walking. The EPAC corridor is designed to create parallel bus and rail line

alongside the Old Northern road. Figure 6.1 shows that the existing corridors in black lines and the

proposed corridors in grey lines (EPAC) and grid shading (EPK).

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 EPAC
Larger Corridor

EPK
Smaller Corridor
Figure 6.1: Map showing existing EPK and EPAC road corridors and the proposed addition of new corridors (Google Maps, 2012)

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On the basis of information on the construction of the two proposed corridors, the visual,

environmental, noise and air pollution effects on nearby properties of the nine affected suburbs are

expected to be greater from the proposed EPAC corridor than for the proposed EPK corridor (where

the corridor expansions are much smaller).

6.2 LITERATURE REVIEW

It is well known that properties close to road corridors are subject to transport-related externalities

(see, for example, Carey, 2001) and that externalities affecting property prices often exhibit spatial

patterns. According to Kutz (2008), transport infrastructure improvement projects produce significant

environmental and social costs. The sources of impacts known to cause significant negative impacts

are loss of visual amenity, noise and air pollution, compulsory acquisition of lands and impacts on

local biodiversity (Hanley et al., 2001). Figure 6.2 shows the well documented negative externalities

resulting from transport-related infrastructure. It can be hypothesised that road corridors such as the

WBTN scheme are therefore likely to generate some, or if not all, of the negative externalities shown

in Figure 6.2.

Figure 6.2: Impacts from transport-related infrastructure improvements (Kutz, 2008).

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According to the relevant literature (see, for example, Lewis et al., 2008; Nelson, 2007; Nicholls and

Crompton, 2005; Pennington et al., 1990), the HP method is an ideal tool for assessing property prices

in relation to certain characteristics, such as structural and neighbourhood variables as well as

environmental quality (e.g. disamenities). These factors include the number of bathrooms and

bedrooms, size and age of the house, distance to environmental amenities or dis-amenities, distance to

a supermarket, school and central business district as well as level of income of the neighbourhood. As

mentioned (Chapter Three), a large number of studies (see, for example, Pope, 2008; Samarasinghe

and Sharp, 2010; Smith and Huang, 1995) have used the HP approach to capture the value of

environmental quality/amenity through property sale price.

The extensive use of this approach validates it as a measure of the impact of externalities in

environmental valuation studies. HP studies conducted by Edel and Sclar (1974) and King (1977)

show the importance of considering public service utilities in close proximity to a property and the

taxes paid by households. Clapp and Giaccotto (1998) have stressed the importance of considering the

age of houses when estimating their value. Their research shows that the age of houses has two effects.

They are (1) the cross-sectional component (depreciation) effect and (2) a demand side component

effect associated with changes in demand for houses of different ages. The main focus of their study

was to estimate the effect of depreciation on house prices. For this purpose, they analysed time series

data in relation to the age of houses and applied an HP function using their assessed values. This was

based on a rational expectation approach where new houses are expected to fetch a higher value than

older ones. They found that the age of a house is a significant variable in HP valuation, aiding the

understanding of the “price-path” trends of properties over a longer period and assists in formulating

price indices.

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Benson et al. (1998) estimated the ‘value of a view amenity’ in a single real estate market in

Bellingham, Washington. They concluded that the willingness to pay for the visual amenity was quite

high. Shultz and King (2001) showed that proximity to large protected natural areas including golf

courses, class II wildlife habitats, and the percentage of vacant land in the vicinity, were positively

related to prices. Tyrväinen (1996) showed the positive impact of urban forests on nearby property

prices using apartment sales data (1,006 apartments) in Joensun, a town of 48,000 inhabitants in North

Carelia, Finland.

Bowes and Ihlanfeldt (2001) examined the direct and indirect effects of transit stations on the

attractiveness of nearby neighbourhoods. This study showed that when the households are situated

farther from a highway and a railway station, the property prices increase. The increase in property

prices is not significant within the first half to one kilometre contour ring, but is significant for the two

to three kilometres contour ring. The marginal property price increase for highway and rail transit is

shown to be 7.7% and 3.5% respectively. Downes and Zabel (2002) studied the impact of

neighbourhood school characteristics on property prices using data for Chicago during the period

1987-1991. By assigning a school to each house, they found school performance (i.e. test scores) had a

significant impact on house prices. The HP method is also widely applied to explore the relationship

between various urban regions and property prices and their implicit marginal prices (see for example,

amenities (Benson et al., 1998; Shultz and King, 2001) and street patterns (Randall, 2002).

Ridker and Henning (1967) studied the relationship between sulphate levels and variation in property

prices in Illinois and Missouri, USA. They found that when sulfation levels dropped by

0.25mg./100cm2/day, the value of that particular property could be expected to rise by between $83

and $245. These findings are consistent with the research of Kim et al. (2003) in showing that property

154
prices increase when pollution levels decrease. Smith and Huang (1995) conducted a meta-analysis

using nearly thirty seven published studies to verify the linear combination of air pollution on property

prices. They used a probit model to estimate how data, model specification and local property market

conditions in cities influence the ability of HP models to uncover negative, statistically significant

relationships, between house prices and air pollution measures.

All these studies demonstrate the strong negative relationship between air pollution and property

prices. On the other hand Kim et al. (2003) found that some particular features of urbanisation were

reflected in increased property prices. These include better connections with street networks, more

streets, shorter cul-de-sacs, smaller block sizes, better pedestrian accessibility to commercial uses,

more evenly distributed mixed land uses and proximity to light rail stations. Some features which

decreased property prices were found to be higher housing density, areas with increased commercial

activity, multi-family and public use facilities (relative to single family use), and access to major

transportation arterials.

This literature review indicates that in addition to structural and neighbourhood characteristics,

environmental disamenities, especially those shown by Kutz (2008), are likely to impact on nearby

property prices.

6.3 DATA AND THE ESTIMATED MODELS

Data used in this study covers the period, 1992 to 2012 and was obtained from secondary sources

including online databases. Real estate data were obtained from two data sources, RP data (RP Data,

2012) and Oldlistings (Oldlistings, 2012). RP data is the most widely used real estate database in

Australia and New Zealand and is subscription-based. Oldlistings database which was used as a

complementary data source can be accessed free of charge. All ‘single house’ properties which were
155
4,000 square metres land size or less within a 5 km distance to the two selected corridors (see, for

example, Nelson, 1982) and which were sold during this period were included in the sample

(Provencher et al., 2008). Townhouses, units and residential condominiums were excluded.

An important requirement in HP studies is that houses should belong to a particular sub-market. Any

outliers or properties with incomplete data were therefore removed from the sample. Nine suburbs

were covered in the survey - six in the EPK corridor and three in the EPAC corridor. A total of 765

property sales, covering 205 streets from either side of the corridors were used in the study. Of these,

494 are in the EPAC corridor and 271 in the EPK corridor.

The spatial data relating to distance was obtained from Google Maps. ABS (2006) data were used for

the socio-economic variables. The spatial variables measured were distance to the proposed road

corridor, distance to nearest state school, distance to nearest supermarket and distance nearest

recreational park. These variables represent the locational importance of the property in relation to the

distance to amenities and disamenities. The distance to the proposed road corridors was taken as the

direct distance calculated by using the “direct distance measuring” option provided in Google Maps.

Direct distance is a better representative for measuring airborne disamenities. Particular care was taken

to accurately measure distance given vehicular noise and air pollution are known to affect households

in a linear manner (Nelson, 1982).

The use of a distance variable as a source of revealing negative externalities is particularly common in

HP studies (see, for example, McCluskey and Rausser, 2001; Morancho, 2003; Nelson, 1982; Nicholls

and Crompton, 2005; Pope, 2008). Further in supporting the argument in this chapter, Strand and

Vågnes (2001) showed that future expected public transportation negative externalities on nearby

properties are reflected in current property prices.

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Table 6.1 describes the variables used in the hedonic function. The categorisation is based on the

classification of attributes used in the HP model. The AGE variable was formulated on the basis of the

architectural design of the house. The information on architectural patterns of Queensland houses

belonging to various time periods was obtained from material published on Queensland building

structures dating back to the beginning of the last century (Ipswich City Council, 2003). The use of

these specific design styles has been found to be a good proxy for the age of the house in the absence

of the exact construction date. The number of bathrooms (BTH) and bedrooms (BD) are also expected

to have a significant impact on house prices. In addition, these variables serve as a proxy for the size

of the house. The size of the land variable is included as a dichotomous variable where it captures the

variation compared to other transformations (log or squared).

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Table 6.1: Definitions of variables used in the regression analysis
Variable Definition Expected
Sign
CPRICE The sold price of the property corrected for inflation N/A

LOGDISTANCE Log distance to the proposed transport corridor (km) +

LOGSMAR Log distance to the nearest supermarket (km) +/-

LOGSCHOOL Log distance to the nearest state school (km) +/-

BD Number of bedrooms +

BTH Number of bathrooms +

CPORT Number of carports +/-

SIZEDUMMY SIZEDUMMY: 1 = size of the property > +/-

700sq.meters and 0 otherwise
MHI Median household income (per month) +

AGE A proxy for age: the year of architectural vintage +/-

AGE2 The squared value of AGE variable (to test for non- +/-
linearity)
DUMMY Dummy: 1 = EPAC road corridor (Large), 0 = EPK -
road corridor (Small)
LOGPARK Log distance to the nearest recreational park (km) -

D_2007 Dummy: 1 for properties sold 2007 and 0 otherwise +/-

D_2008 Dummy: 1 for properties sold in 2008 and 0 otherwise +/-

D_2009 Dummy: 1 for properties sold in 2009 and 0 otherwise +/-

D_2010 Dummy: 1 for properties sold in 2010 and 0 otherwise +/-

D_2011 Dummy: 1 for properties sold in 2011 and 0 otherwise +/-

D_2012 Dummy: 1 for properties sold in 2012 and 0 otherwise +/-

*The period 1992 to 2006 is used as the base period.

158
The median household income for the suburb (MHI) captures the income status of the suburb. This

variable can also be used as a proxy to gauge the purchasing power of a household. It is a standard

variable used in HP studies. The spatially measured variables represent the locational importance of a

particular property in relation to amenities and disamenities. As mentioned in the introduction to this

chapter, the main purpose of this study is to demonstrate the existence of spatially related negative

externalities generated by the existing and proposed road corridors. Hence, the most important

variables in this respect are the distance to the existing and proposed road corridor (LOGDISTANCE)

and the DUMMY variable that captures the effect of the magnitude of the two proposed corridors on

nearby property prices. The DUMMY variable is based on information regarding the extent of the

expansion and impacts of the proposed corridors (see, Department of Transport and Main Roads,

2009).

The distance to the nearest park variable (LOGPARK) measures the price-premium imposed on

property prices by an environmental amenity. Many previous studies allude to this fact (Pope, 2008).

However, the evidence can be mixed where there are other variables present such as level of crime and

disorderly activities associated with parks notwithstanding they provide recreational amenities

(Hilborn, 2009). The SCHOOL and SMAR variables independently measure public service

capitalisation on property price which can be defined as the price premium placed by available public

utilities on property prices. Previous studies showed that households consider proximity to schools and

supermarkets as important when they decide on purchasing a property (Downes and Zabel, 2002;

Morancho, 2003).

The ‘D’ dummy series represent the different years of sales and the variation in price. Six such

dummies are created (D2007-D2012) which capture the temporal variation of property prices.

159
 = + (6.1)

In the above equation is a vector of property prices, is a matrix of explanatory variable and is a

vector of parameters to be estimated. The error term is assumed to be normally distributed and

uncorrelated.

= + + + _2007 + _2008 + _2009 + _2010

+ D _2011 + D _2012 + + +

+ + + +

+ + + 2

+ (6.2)

Anselin (1988) stated spatial autocorrelation is one of the main consequences of using geographic

data, especially when properties are located close to each other. Spatial dependence occurs when the

price of a property located in a particular suburb is determined both by its own property attributes and

related characteristics and the prices and characteristics of nearby properties. However until recently

few papers have tested for spatial autocorrelation (Izon et al., 2010). Recent studies which take spatial

autocorrelation into account include Anselin and Lozano-Garcia (2009) and Izon et al. (2010). They

indicated that the presence of positive spatial autocorrelation affects the estimated coefficients and

overall results of the study. Conceptually, positive spatial autocorrelation refers to a clustering of

similar property prices whereas negative spatial autocorrelation refers to a close association of

dissimilar property prices (Anselin, 1988).

Moran’s I statistic is routinely used to provide proof of global spatial dependence which takes into

account the level of spatial clustering or dispersion patterns. It ranges between -1 to +1 where -1

160
implies extreme negative spatial autocorrelation (aggregation of dissimilar observations) and +1

implies extreme positive spatial autocorrelation (clustering of similar observations). A zero value

provides evidence of no spatial autocorrelation. The estimation is undertaken by using residuals of the

OLS and a spatial weight matrix which describes the clustering pattern and effect of the weighted

average of neighbouring property prices on the considered dependent variable.

The variables used in the HP model are defined in Table 6.1 while the descriptive statistics are shown

in Table 6.2. The mean of house prices used for the analysis is AUS$ 491006.3 and the standard

deviation is AUS$ 190394.5. The number of bedrooms and bathrooms has a maximum of 6 and 5

respectively. The variable used in this analysis to capture the negative externality is the DISTANCE. It

has a mean of 1.342 km with 0.024 km minimum and 4.9 km maximum.

Table 6.2: Descriptive statistics for the selected variables

Variable Mean Std.Dev Min Max
PRICE 491006.300 190394.500 15700 3000000
BTH 1.663 0.693 1 5
BD 3.467 0.758 1 6
D_2007 0.230 0.421 0 1
D_2008 0.234 0.424 0 1
D_2009 0.288 0.453 0 1
D_2010 0.021 0.143 0 1
D_2011 0.026 0.160 0 1
D_2012 0.129 0.336 0 1
CPORT 0.937 0.545 0 4
MHI 4946.774 1871.039 2088 9069.2
DUMMY 0.646 0.479 0 1
SIZEDUMMY 0.354 0.479 0 1
DISTANCE 1.342 0.939 0.024 4.9
SMAR 2.335 1.356 0.2 7.2
SCHOOL 1.568 0.765 0.04 6.7
PARK 1.342 0.833 0.01 4.4
AGE 1969.340 17.094 1920 2000

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This information is important to show the spread of variables around their corresponding mean values.

To better fit for the functional form some of these variables have been transformed into log in the

regression analysis.

6.4 EMPIRICAL RESULTS

Table 6.3 shows the OLS results for the analysis. Indicated is a significant impact from the road

corridor as the LOGDISTANCE variable is positive and significant. The results for the Lagrange

multiplier test for the diagnosis of spatial dependence is given in Table 6.4. The results for Spatial Lag

model (SAR) that are used in this study is given in Table 6.5.

Table 6.3: OLS results

Variable OLS
Coefficient t-Value
BTH 17384.95* 1.46
BD 31035.17**** 2.94
D_2007 102466.9**** 3.82
D_2008 130465.6**** 4.89
D_2009 125913**** 4.81
D_2010 432185.6**** 6.83
D_2011 353805.1**** 5.99
D_2012 232727.8**** 5.59
CPORT -17307.05 -1.17
MHI 30.97278**** 4.1
DUMMY -124954.2**** -7.82
SIZEDUMMY -4088.036 -0.29
LOGDISTANCE 21633.46*** 2.54
LOGSMAR 12090.21 0.92
LOGSCHOOL 21845.21** 1.53
LOGPARK -8301.577 -0.8
AGE 35782.89 0.48
AGE2 -9.23E+00 -0.48
R2 0.21
Adj-R2 0.19
Moran’s I 2.38*** 0.017
Note: **** Significant at 1%, *** Significant at 2%, ** Significant at 13% and * Significant at 15%

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Table 6.4: Results for the Lagrange multiplier test
Tests Statistic P-value

LM_Error 3.89* 0.049

Robust_LM_Error 8.12**** 0.004

LM_Lag 8.39** 0.004

Robust_LM_Lag 12.63** 0.000

Note: *, **** are significance levels of 5% and 1% respectively.

6.5 SPATIAL LAG MODEL

According to the test diagnostics in Table 6.4, it can be concluded that the spatial lag model is the

most suitable for this analysis according to the test statistic since the error term is autocorrelated.

Hence, the spatial lag model is used for the interpretation. Therefore, there is a need to relax the

assumption made for the error term in Equation (6.1). The methodology applied in this analysis is

broadly discussed in the section 4.9.1 in Chapter Four. The spatial models used for the analysis is

given in the equations 4.1, 4.2 and 4.3. The results for the spatial models are given in the Table 6.5.

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Table 6.5: Results for spatial lag model
Variable Spatial Lag Model (SAR)
Coefficient t-Value
BD 32423.37**** 3.13
BTH 15972.7* 1.37
CPORT -16241.91 -1.12
SIZEDUMMY -2283.813 -0.16
MHI 24.67865**** 3.22
AGE 38467.18 0.52
AGE2 -9.886634 -0.53
LOGDISTANCE 19249.03*** 2.3
DUMMY -105659.3**** -6.26
LOGSMAR 8899.316 0.69
LOGSCHOOL 20625.89** 1.47
LOGPARK -8669.402 -0.85
D_2007 103852.4**** 3.95
D_2008 131777.9**** 5.04
D_2009 126408.1**** 6.32
D_2010 397969.3**** 6.5
D_2011 322715.1**** 5.5
D_2012 209488.4**** 5.05
R2 N/A N/A
0.173 3.05
Wald Test : =0 9.276****
LR Test : =0 9.015****
Note: **** Significant at 1%, *** Significant at 2%, ** Significant at 13% and * Significant at 15%.

164
In most studies the discount effects arising from road corridor related externalities are estimated as a

spatially distributed factor (see, for example, Nelson, 2007; Fidell, 2003; Strand and Vågnes, 2001;

Uyeno et al., 1993). Similarly in this analysis the main focus is with the spatial component. Of interest

are the perceived negative externalities associated with the existing road corridors, the possible effect

from its widening under the WBTN project and its effect on property prices. The relevant variables are

LOGDISTANCE and DUMMY.

Previous studies have paid considerable attention to the spatial effects given they significantly

influence property prices (see, for example, Hyman and Pasour, 1973; Pereira and Roca-Sagales,

2003). The distance variable captures the distance to the existing and proposed road corridors (see,

Figure 6.1) and the expected negative externalities. The expected negative effects resulting from the

large expansions are captured by the DUMMY variable. The negative sign shows that the larger

corridor expansion (EPAC) has a bigger effect on property prices. As shown by other studies, the

distance from a source of externality in a spatially distributed manner (noise and air pollution, visual

amenity) best describes the property prices when the effects from these sources change (see, for

example, McCluskey and Rausser, 2001; Morancho, 2003; Nelson, 1982; Nicholls and Crompton,

2005; Pope, 2008; Rodriguez and Mojica, 2009).

The distance coefficient (LOGDISTANCE) is positive and significant at the 3% level. Hence the

MWTP to be farther from the road corridors is AUS$ 318 per one metre.

As noted in the literature, the age of a house is an important determinant of property price. It reflects

the value of architectural design, quality of the structural components and the preference of a

consumer for such features. This is an important parameter that has been taken into account in many

studies (Bowman et al., 2009; Lewis et al., 2008; Pope, 2008). The intended sign of the coefficient can
165
either be negative or positive given the underlying characteristics that affect the value judgment about

the age of property. The AGE variable in this study has standardised prices for 1920, 1940, 1950,

1960, 1970, 1980, 1990 and 2000 architectural structures. In addition an AGE2 variable is included to

capture the possible non-linearity with the AGE variable. However these variables are not significant

in this study.

Six of the dummy series variables which represent the different years of sales are statistically

significant and show a change in property price, especially a decline in 2009. However, it is not

possible to draw any firm conclusions which can be linked with the community consultation period

and the announcements regarding the construction of the road corridors since the primary data are not

used for this analysis. Finally, the CPORT variable is negatively associated with property price, a not

unusual outcome (see, for example, Abelson, 1979).

The variables (LOGSCHOOL and LOGSMAR) used to capture the effects of public utilities do not

show the expected negative signs but are not significant. Hence it can be assumed that distance

sometimes represents the positive effect of being included into a particular zone (school zone)

(Walden, 1990). The LOGPARK variable which shows the value of being closed to a recreational park

has the expected negative sign.

6.6 PROPERTY PRICE VARIATION OVERTIME

One of the main objectives of this thesis is to analyse the effect of information asymmetry in the real

estate property market which has not been examined in previous hedonic or other studies. In this

section the main intention is therefore to provide sound empirical evidence to test this hypothesis. In

the literature the idea of information asymmetry in the second hand car market and the labour market

are discussed but there is no significant level of application of the Akerlof’s model. Only mathematical
166
proofs exist. In the analysis of the WBTN road corridor expansion, it was found there is a significant

impact from the announcements based on the expansion levels. The Everton Park to Albany Creek

road corridor has a higher welfare effect (MWTP) compared to the Everton Park to Kedron Road

corridor indicating the level of information plays a key role in determining the welfare effects.

In this analysis, the same two corridors which were used for the HP analysis are used to examine the

Akerlof lemon effect. The two corridors were used because they do not violate the hedonic analysis

assumptions of market segmentation (Murthy et al., 2003). To show the effect of information

asymmetry a control site was selected to compare the study sites with. In this approach, the average

variation of property prices is taken over almost two and half decades. The intention is to detect any

price degenerating effects in the study site when compared to the control site. In selecting the control

site the socio-economic and geographical characteristics (household dispersion pattern) of the study

sites is used to match the control site. Further, the number of lanes on roads was used as an additional

criterion to find the most appropriate control site.

The distribution of residential properties is a key factor in comparing the study and control sites.

Therefore, in this analysis the Old Cleveland road is used as the control site since it meets the criteria

cited. Further, fewer properties have come onto the market in the control site near roads compared to

the study site. This may be due to lower uncertainty in the control site as a result of lack of

announcements compared to the study site.

Table 6.6 provides the average price variations of the study sites and the control site. According to the

average values it is concluded that the study sites have lower and decreasing average prices while in

the control site, average prices have been increasing. However there can be market related fluctuations

167
apart from the announcement of a proposed road corridor that could cause price variations. To control

for this, all the prices used in the table are corrected for inflation (CPI correction).

Table 6.6: Average property price variation between the study sites and the control site (inflation
corrected)
Sites Decades / Time duration Average price (AUS$)
Control Site 1990-1999 440,637
2000-2009 455,053
2010-2012 554,950
Study Sites 1990-1999 521,053
2000-2009 506,339
2010-2012 407,766

Also the effect of time on market (TOM) shows that in the study sites properties took a longer time to

sell than in the control site. This is to be expected. Table 6.7 shows that houses in the study sites have

longer TOM value compared to the control site.

Table 6.7: TOM for study site and control site

Site TOM (Average days in
market)
Study sites 72

Control site 53

In addition to the above analyses, an OLS regression for the control site is run using the same

variables used for the study sites. It is hypothesised that properties close to the road will be lower in

price than those farther away, but the magnitude of the impact on property prices will be much lower

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than those that can be expected in the study sites. Table 6.8 shows the variables used for the control

site analysis. The variables selected are similar to those in the study site.

6.7 CONTROL SITE ANALYSIS

This section describes the variables used in the control site analysis. Structural attributes and amenity

variables are used to describe the WTP in a similar way to the study sites. Table 6.8 shows the

descriptive statistics for the data used for the analysis. In this analysis, data from real-estate sales

alongside the Old Cleveland road covering four suburbs are used. They are Coorparoo, Camp Hill,

Carina Heights and Carindale. Three hundred and fifty observations were used in the OLS analysis

covering 35 streets and therefore provide a representative geographic coverage. The analysis is

confined only to the OLS method because it provides the basic outline with which to compare the

results with the study site. Also it further explores the influence of the “with and without” effect of a

development project in relation to negative environmental externalities whereas before and after

effects are considered in the study site analysis. This meets the main objective in using a control site

analysis. The variables used for the analysis are defined in Table 6.7.

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 6.7.1 CONTROL SITE: OLD CLEVELAND ROAD

Figure 6.3: Control Site - Old Cleveland road (Google Maps, 2013)

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Variables in Table 6.7 are used to compare the results with similar variables used in the study site.

The applied functional form depends on the distribution of the data set. However, the interest is in

the coefficients of the estimated models and not in the functional form.

Table 6.8: Definitions of variables

Variable Definition Expected Sign
CPIPRICE Consumer price index corrected property price N/A
BD Number of bedrooms +
BTH Number of bedrooms +
CPORT Number of carports +/-
SIZE Size of the land (Sq. Metres) +
DISTANCE Distance to Old Cleveland road (km) +
SUPERMARKET Distance to supermarket (km) +/-
SCHOOL Distance to school (km) +/-
PARK Distance to park (km) +/-
AGE Age of the house: architectural vintage +/-
MHI Median household income (Aus $) +/-
D_2007 Dummy: 1 = property is sold in 2007 and 0 +
otherwise
D_2008 Dummy: 1 = property is sold in 2008 and 0 +
otherwise
D_2009 Dummy: 1 = property is sold in 2009 and 0 +
otherwise
D_2010 Dummy: 1 = property is sold in 2010 and 0 +
otherwise
D_2011 Dummy: 1 = property is sold in 2011 and 0 +
otherwise
D_2012 Dummy: 1 = property is sold in 2012 and 0 +
otherwise

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The descriptive statistics of the variables used for the control site analysis are shown in Table 6.8. As

for all the analyses in the thesis, the inflation adjusted house price is used as the dependent variable.

The mean of CPIPRICE is AUS$ 556703 and the standard deviation is AUS$ 199762.1. The

maximum for bedroom and bathroom are 7 and 4 and the means are 3.321 and 1.545 respectively.

The important variable for the comparison with the study site is DISTANCE. As hypothesised it is

expected that this variable will have a positive sign but have a lower MWTP compared to the

distance variable in the study site analysis. The mean and the standard deviation of the DISTANCE

variable are 0.784 km and 0.578 km respectively.

Table 6.9: Descriptive statistics

Variable Mean Standard Min Max
CPIPRICE 556703.000 199762.1 38169.31 1136662
BD 3.321 0.919 1 7
BTH 1.545 0.678 1 4
CPORT 1.414 0.843 0 5
SIZE 622.536 158.762 36 1277
DISTANCE 0.784 0.578 0.43 2.22
SUPERMARKET 0.929 0.411 0.12 1.6
SCHOOL 0.858 0.405 0.18 1.9
PARK 0.732 0.416 0.011 1.9
AGE 1960.248 21.165 1930 2010
MHI 1447.536 117.991 1323 1559
D_2007 0.114 0.318 0 1
D_2008 0.082 0.274 0 1
D_2009 0.09 0.287 0 1
D_2010 0.076 0.265 0 1
D_2011 0.105 0.307 0 1
D_2012 0.035 0.184 0 1

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6.7.2 THE HEDONIC MODEL USED IN THE ANALYSIS

Equation (6.3) shows the functional form used in the HP model for the control site analysis.

= + + + + +

+ + + + +

+ 2+ _2007 + _2008 + _2009 + _2010

+ _2011 + _2012

+ (6.3)

Table 6.10 shows the results of the OLS analysis where the main focus is on the ‘DISTANCE’

variable. The interpretation of the other coefficients is not a priority in this section. This is because

the objective is to test whether the study sites have been affected by the announcements of proposed

corridors and the impact distinguishes them from the control site. Hence, the DISTANCE variables

in the study site and the control site are compared. According to the study site coefficient, property

prices increase by AUS$318 for one meter distance from the proposed road corridors. For the control

site it is AUS$ 0.037 for a metre and AUS$ 37.8 for a kilometre. Therefore, it can be concluded

there is a significant impact from the announcements of proposed road corridors on property prices

in the affected areas.

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 Table 6.10: OLS results
Variable OLS
Coefficient t-Value
BD 24761.01**** 2.19
BTH 90743.78**** 5.9
CPORT -12961.26** -1.94
SIZE 95.8613*** 2.16
DISTANCE 37.87302** 1.67
SUPERMARKET 37170.22 1.32
SCHOOL 9856.638 0.37
PARK 51589.44*** 2.16
AGE 51.81253 0.11
MHI 136379.9*** 2.14
MHI2 -47.2592*** -2.14
D_2007 215968.8**** 7.95
D_2008 217917.1**** 7.09
D_2009 203957.2**** 6.96
D_2010 212518.3**** 6.67
D_2011 152384.5**** 5.39
D_2012 107585.2**** 2.33
R2 0.48
Adj. R2 0.45
Note: The significance levels of ****, ***,and ** are 1%, 5% and 10% respectively.

Equation (6.4) shows an alternative regression with log transformed variables

= + + + + +
+ + + +
+ + _2007 + _2008 + _2009 + _2010
+ _2011 + _2012
+ (6.3)

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 Table 6.11: Control site’s alternative regression
Variable OLS
Coefficient t-Value
BD 24084.92*** 2.14
BTH 91944.38**** 5.99
CPORT -13640.8*** -2.04
SIZE 99.666*** 2.25
DISTANCE 35.55774** 1.62
LOGSUPERMARKET 32551.15** 1.93
LOGSCHOOL 6700.087 0.39
PARK 49005.55*** 2.16
AGE 94.66546 0.2
LOGMHI -369814.2 -1.05
D_2007 217743.1 8.06
D_2008 216724.4 7.08
D_2009 205342.6 7.05
D_2010 213375.8 6.74
D_2011 151266.4 5.37
D_2012 105265.3 2.29
2
R 0.48
Adj. R2 0.45

6.8 CHAPTER SUMMARY

As discussed in the literature review in this chapter, as well as in Chapter Three, road corridors and

large infrastructure projects are likely to impact negatively on property prices. There are however

exceptions. In this thesis it is hypothesised that the announcement of the proposed two road corridors

is likely to impact on property prices even before the commencement of the projects due to

perceived negative externalities.

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The regression results in this chapter confirm the hypothesis. The results show the MWTP to be

farther from the existing and proposed road corridors is AUS$ 318 per metre within a five kilometre

range from the two road corridors examined. Since many existing road corridors of this nature

impart a negative impact on nearby property prices, it is not possible to directly link the

announcement of additional road corridors to the existing road as the sole cause for the negative

impact on property prices. However, it is possible that the announcement of the proposed road

corridors may have increased the severity of the negative externalities and hence the impact on

property prices. In order to isolate the impact of corridor announcements on property prices a

dummy variable is created based on the magnitude of the corridor expansions. As hypothesised,

EPAC has a larger impact than the EPK corridor expansion. Since EPAC is the larger and EPK is the

smaller of the proposed extensions (see Figure 6.1), this provides clear evidence that the magnitude

of proposed road corridors also has an impact on property prices notwithstanding the fact that

construction had not commenced. This finding has important policy implications.

In addition to the regression results, there is other evidence to show that proposed projects such as

the corridor expansions examined are likely to impact on property prices. It is shown that the

average property price for the study site areas has been decreasing, while for the control site average

property price has been increasing. Furthermore, the average time a property remains on the market

is shown to be considerably longer for the study site than for the control site. In addition, the

regression analysis conducted for the control site showed that the Old Cleveland road does have an

impact on nearby property prices, but the price (welfare) effect is much smaller.

There is also anecdotal evidence to show that when project announcements such as WBTN are

made, the frequency of houses being put up for sale in the affected areas increase. This observation

176
has been confirmed by real estate agents. Hence, the hypothesis is that sellers anticipate a

devaluation of house prices due to the impact of large proposed projects. This phenomenon has a

similar characteristic to the financial market phenomenon called “flight-to-quality”. This describes

investors’ tendency to sell what they perceive as high-risk investments and purchase safer

investments.

Furthermore, communities in the affected areas protest when project announcements with negative

impacts are made. These protests relate to the expected disamenities which flow from the project

once the work commences and once the traffic corridor is completed. Disamenities, as the literature

review shows, result in lower prices of the affected properties. Because of the extent of publicity on

adverse effects generated by large projects such as WBTN, it is assumed that buyers are to a large

extent aware of the relevant issues. Hence it is assumed that they would, consequently, be willing to

pay less for properties where the road corridor extensions are larger. It is further assumed they are

willing to pay a higher price for a house to be farther from established and/or proposed corridors.

The regression results (LOGDIS and DUMMY) confirm this.

The key issue raised in this chapter is that the impacts on property owners are likely to begin from

the time projects are announced or discussed (although they are likely to be more pronounced if and

when the project goes ahead). The study indicates a need for relevant authorities to consider the

effects on house prices due to announcements of proposed projects not only from the time the project

work commences, but also from the time the preliminary announcements/discussions are made. It is

equally important that recognition is given to the fact that some projects can take decades to

materialise and indeed may not materialise at all. This does not mean that the prices of residential

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properties in the proposed project areas are immune from the negative effects from the

announcements.

Although the findings of this chapter clearly show that there is a significant impact from the

announcements of proposed corridors, the hedonic results provide only a partial analysis. This is

because HP analysis uses only revealed data and does not analyse data at an individual level. This

void is addressed in the HP literature by collecting primary data from households in the affected

areas (the two corridors that are used in the study). The data collected enables an analysis of various

issues at an individual level including buyers’ actual level of awareness about the WBTN scheme by

relaxing the assumption of perfect information inherent in HP models. Such an analysis reveals a

number of important issues which were hitherto not known or previously examined. For example,

the analysis shows that HP models only provide lower bound estimates. In the presence of

information symmetry, the impacts from negative externalities are likely to be larger. Pope (2008)

confirmed this hypothesis by conducting a before and after analysis of the introduction of mandatory

information disclosure in the USA.

The models that deal with information awareness and satisfaction levels using primary data

conducted for this thesis are dealt with in Chapter Seven.

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CHAPTER SEVEN

INFORMATION AWARENESS AND THE SATISFACTION

OF HOME OWNERS

7.0 INTRODUCTION

In this chapter information availability to each home owner and their level of satisfaction about the

current location and the environmental amenities they currently experience are examined. In a real

market-based study it is important to investigate consumer’s individual knowledge of their choices

and the returns they actually obtain. In most HP valuation studies primary data are rarely used. This

void is addressed in this chapter.

A problem that arises in HP method is that it is susceptible to omitted variable bias where the

researcher is unable to include all the factors that determine the price of a house. To overcome this

studies have used a before and after approach and employed certain econometric techniques to

resolve remaining biases (Pope, 2008). Pope’s study showed that there are significant decreases in

property prices when relevant information is disclosed. As shown in Chapter Six there is a

significant price depreciation due to the announcements of proposed corridors. However, this is only

a partial estimate. This is because, according to the primary data collected for this study, 83 per cent

of the respondents were unaware of the proposed corridors. Hence, this situation can lead to

information asymmetry in the market as shown in Table 6.6. If information asymmetry did not exist

then welfare effects arising from negative externalities are bound to be larger compared to that which

HP models estimate. As noted, HP models assume information symmetry. This chapter shows that

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there is a considerable degree of information asymmetry in the property market and hence current

HP models provide only lower bounds of welfare measures.

Capturing temporal information shocks through before and after studies have their own biases such

as not considering the market capitalisation of property prices over time. Hence, the best approach to

control for information effects is to individually investigate the information levels. The other

important feature of this study is that the auxiliary analysis is carried out, apart from the hedonic

valuation, to obtain the more accurate information effects of road corridor announcements and to

examine what factors influence the level of awareness of buyers. This method of analysis provides a

means to check the problems and conditions stated in Akerlof’s information asymmetry model

where informationally advantaged parties have the upper-hand in transactions. Furthermore, through

a satisfaction model we examine the current level of utility that consumers experience living in areas

where announcements of proposed corridors have been made. This is important as an ex-post

analysis because it is believed that informationally disadvantaged parties are locked-in after a

transaction is effected. This chapter, therefore, highlights the importance for the HP analysis and its

relation to the information awareness and the satisfaction levels of buyers.

The analysis addresses research objectives, four and five and research questions five and six

mentioned in Chapter One. This chapter consists of six sections including the chapter summary.

Section two provides a detailed overview of the logit and probit models applied in the awareness and

satisfaction models respectively. The theory and the econometric methodology are discussed. In

Section three the information awareness model results are discussed. The factors determining

information awareness is described and their justification for WBTN study. Section four describes

the ordered probit model which is used to determine the buyers’ current level of satisfaction. The

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results of the ordered probit model are set out in section five. The findings of the chapter are

summarised in Section six.

7.1 BUYERS’ INFORMATION AWARENESS

Given the presence of the omitted variable bias (Guignet, 2012) and in the absence of full

information, hedonic estimates are likely to be biased. Hence, it is important to check the individual

level of information awareness and how buyers used available information in purchasing their

current property in the WBTN sites. An information asymmetry is to be expected in market

transactions due to adverse selection and moral hazard (discussed in the Section 3.6.3 in Chapter

Three). Hence, it is important to distinguish the welfare effects on the groups that have the least and

highest information of the goods and services they purchased. By examining the level of information

buyers had at the time of purchase, the better-off and the worse-off parties can be identified, and the

welfare effects and potential compensation involved can be derived.

In welfare economics, it is evident that people who have better access to information derive greater

benefit from a transaction than those who have less access to information. Hence, compensation

could be dispensed according to the level of access to the pre-transaction information. Modica and

Rutsichini (1994) showed that agents/subjects are aware of something (that is a level of information)

when they are certain of the probability of an event happening. If a subject does not know of

something, he is uncertain of it. On the other hand he is unaware of something when he does not

know about it. This logic is similar to the consumers’ decision making model applied in this thesis.

Modica and Rutschini also proposed on the basis of Sherlock Holmes stories that if a subject is

aware of something, only he knows about the probability of it happening. If he does not know at all,

then he is neither certain nor uncertain. In other words, awareness arises with the truthfulness of an
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event. Hence, certainty and uncertainty decide awareness. Accordingly, if a person knows about

something, then he has the knowledge of it and is certain or aware of the event. Moreover that

person does not know and he knows that he does not know, it is also a state of which he is aware. All

other forms where subject does not know of something constitute a situation of unawareness.

Therefore, the level of knowledge determines the level of awareness.

The importance of information in economics is emphasised by Lanham (2006). He argued that the

information about all the factors of production was more important than information about the

factors themselves. Thus “economics of attention” mattered the most because what economic agents

lacked was not the actual factors of production but reliable information of them. For example, in an

economy of stuff, the doctrine or method that governs the isolation of material from the earth core

and producing goods stands at the centre. The arts and the letters, notwithstanding they are

important, are of peripheral importance in an economy of stuff. However in an economy of attention

(arts and letters) they change the places and stand at the centre. They are the disciplines that

investigate how attention is allocated, how cultural capital is created and traded.

Teisl et al. (1999) using information about diet-disease have shown that information awareness and

education have a positive relationship. In this study, they pointed out that government agencies are

not allowed to educate the public through private organisations (food companies). However, by

quoting a study of Calfee and Pappalardo (1989), they noted that private sector information

provision is more effective for the people who are difficult to reach through public education

campaigns. Even so, Levy and Fein (1998) in a US study showed that information provided on

products about nutrients are less likely to educate all consumers because Americans generally use

the news media to get the information about diet.

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From these studies consumers can be assumed to have choice over the source of the information they

use for decision making.

These findings are also similar to the methods and criteria that apply in this study given the

determinants of awareness used are the source of information and education. Buyers' information

search behaviour is used to check for the way in which they attempt to verify information. This is an

important further step in the analysis of information awareness where, except a few studies in the

finance literature, previous studies have not considered the significance of the information

verifiability in market transactions.

In a developing country scenario, information awareness is linked to the level of poverty. Jalan et al.

(2003) study used the level of knowledge and education of respondents in relation to water-borne

diseases in India to determine the level of awareness. They showed that when the education level

goes up the willingness to pay for the water purification program rise. They further pointed out that

the level of awareness is dependent on the poverty level and the knowledge of the benefit of

environmental quality. This assumed that this knowledge indirectly comes from education. Jalan et

al. also estimated that when the years of school increases from 3 years to 10 years the willingness to

pay increases from Rs.212 per person per year to Rs.314. Moreover when the respondents’ level of

wealth and access to public media are high, their willingness to pay increases. The economic

algorithm and econometric estimation procedures used by Jalan et al. are compatible with the

methods applied in this chapter.

Another aspect of information awareness is its importance where national security issues are

involved. Wang et al. (2002) have discussed the importance of timely accessibility, accuracy,

relevancy, and timely integration of data in making correct decisions relating to national security. In
183
order to enhance the quality of information used they suggested that Total Information Awareness

(TIA) is vital for achieving better counter-terrorism programs. Although this study has different aims

to that of this study, the concept used by Wang et al. shows a similarity to the concept developed in

this chapter. Wang et al. concluded that information quality can be improved by the interdisciplinary

approaches that treat the data with due relevancy and importance.

In a different study Binkley et al. (1999) studied consumers' price awareness of surcharged goods

which were priced up to 40% higher compared to half-sized quantities. The consumers were

unaware of this and were attracted to the larger quantity. However the higher prices with surcharged

items are not necessarily due to the increased quantity but to price promotions and pricing errors.

More than 50% of consumers were not aware of the existence of the surcharge and were unaware of

quantity-price variations. The determinants Binkley et al. used to test the price awareness are similar

to those used in this study’s information awareness analysis including, for example, income and

education. They found that income has a negative association with price awareness and a positive

impact from the level of education.

A number of other studies have also considered the importance of the awareness of individuals in

decision making. Jensen et al. (1992) examined health awareness of consumers for retail food items

focussing on the advertised information about the nutritional status of food items. In doing so they

investigated studies in the literature relating to time series and cross-sectional data sources and the

temporal effects of consumers’ tastes and preference changes (awareness) and their impact on food

demand. Here they applied the Marshellian demand function for the dairy products. As a new

approach, they included the information variable that includes consumers’ awareness and attitudes

about the dairy products. They point out that information plays a big role in consumer decision-

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making referring to the works of Kotowitz and Mathewson (1986), Kihlstrom (1974) and Pope

(1985).

Others have focussed on the way in which people value environmental attributes and how people

place a value on the natural safety-nets offered by nature. They include ozone layer, forest covers,

stream flows and biodiversity endowment. Maccann et al. (1997) studied the environmental

awareness of two groups of farmers - conventional farmers and organic farmers – as well as farmers’

conservation attitudes and behaviours with demographic and family characteristics. According to

their findings both groups of farmers were willing to take risks although organic farmers had a

greater tendency to incur present risks so as to gain future benefits. Furthermore, organic farmers

were shown to have a greater concern for the long-term environmental sustainability. The difference

in awareness was attributed to their behavioural changes and attitudes stemming from their

livelihoods. This intuition can be used to explain the effect of some of the variables of the awareness

model such as level of income, level of education and state of migration.

Maccann et al. (1997) and Ferrer-i- Carbonell and Gowdy (2005) studied the relationship between

environmental awareness and happiness of people using data obtained from the British Household

Panel Survey (BHPS). They described relationship between self-reported happiness and individual

behaviour is a phenomenon present in this study where individual decision making is examined. In

particular the use of individual well-being measures is important to distinguish the trade-offs

between income and other factors such as pollution, noise, health, and family characteristics. This is

because wealthier and happier people are shown to be more willing to avoid the negative

externalities such as noise and air pollution.

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Ferrer-i- Carbonell and Gowdy (2005) measured happiness levels using an ordered probit model

which is a similar approach to that used in this chapter. Consumers’ satisfaction level is not

observable directly but lies within a range (in this case 0 – 3). The two environmental awareness

indicators used were individuals who care about the ozone depletion and individuals who care about

biodiversity and animal extinction. The results showed that people who care about ozone depletion

have a negative correlation with subjective well-being. The opposite was also evident - which is that

individuals who care about the bio-diversity and animal extinction have a positive correlation with

the subjective well-being. This is relevant given the psychological traits that governed the

individuals of the two groups in the study.

7.2 METHODOLOGY APPLIED IN BUYER AWARENESS AND

SATISFACTION MODELS

The information disclosure by a seller or a property agent is a critical factor when a property

transaction occurs. In some countries (Pope, 2008 for the USA) it is mandatory to reveal all the

information about the property that is related to the seller. This information provision is undertaken

by real estate agents, owner or the broker of the transaction. In the Australia it is not mandatory to

disclose relevant information on the property which may include locational disamenities and

environmental hazards impacting on the property. However, this information provision can generate

a significant impact on the transaction decisions of the buyer whether to buy or not. In this study, the

model used by Wiley and Zumpano (2009) is adopted with necessary changes. According to Wiley

and Zumpano information disclosure is extremely important to buyer’s decision-making.

Furthermore, a number of other studies underline the importance of disclosing verifiable information

in the field of finance. Yosha (1995) discussed the trade-off between bilateral and multilateral

186
financial arrangements and their effect on the firms’ stability given the level of disclosing of

verifiable information.

This study’s model is based on the simple logit model where the options of awareness and

unawareness are the binary dependent variable in the model. The econometric establishment of a

simple logit model can be described as follows. The logit regression can be used as a

uni/multivariate technique which permits the estimation of the probability that an event occurs or not

through a prediction of binary dependent outcome which result from a set of independent variables.

In this scenario, it is the information awareness of buyers that is determined by the set of

independent variables. Hence, in the Equation (7.1) is the probability of information awareness

and is the set of independent variables that determine the probability.

Of interest is the role of the relationship in Equation (7.1) for information awareness in the linear

probability model:

= ( =1| ) = + (7.1)

where, is the set of independent variables and = 1 indicates there is information awareness

when a property is sold.

The relationship below represents the role of information awareness:

= ( = 1| ) = = (7.2)
[ ( )] ( )

where = +

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Equation (7.2) is defined as the cumulative logistic distribution function. In this condition ranges

from −∞ to +∞and ranges from 0 to 1. Here is non-linearly related to and hence to . This

condition satisfies the requirements for a probability model.

is non-linear not only in but also with the . This situation creates an estimation problem of

the logit function by OLS procedure.

In this explanation is the probability of information awareness:

1
(7.3)
1 + exp (− )

Hence the probability of unawareness is (1 − ),

(7.4)
( )

Therefore this can be written:

( )
= (7.5)
( ) ( )

is the ratio of information awareness to information unawareness . It is also the odds ratio in
( )

favour of the awareness of information. To obtain the logit function the natural log of the Equation

(7.5) is taken:

= ln (1 − ) = = + (7.6)

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Since the log of the odd ratio is not only linear in but also linear in parameters then this is

estimated through the OLS procedure.

Another estimation feasibility in the logit model as shown in Equation (7.6) is that unlike the linear

probability model shown in Equation (7.1) it allows a better model fitting criteria for the

dichotomous dependent variable. This is because in linear probability models there is a less

significant relationship between and where linearly increases with resulting in a constant

marginal effect for every observation. This condition is difficult to justify with the actual situation.

To overcome this logical problem therefore, a probability model has to have two key features. They

are (1) as increases, = ( = 1 | ) increases but never takes a value outside the 0 to 1 range

(2) The relationship between and is non-linear. That is approaches zero at a slower rate when

acquires smaller and smaller values and approaches one at a slower rate when gets larger and

larger.

There are several features of logit models which are applied in this thesis and are discussed below:

1. As P goes from 0 to 1, the Logit goes from -∞ to + ∞. That is, although the probabilities lie

between 0 and 1, the logits are not bounded.

2. Although is linear in , the probabilities are themselves not.

3. The interpretation of the logit model is as follows: The slope coefficient, , measures the

change in , for a unit change in . That is it tells how the log odds in favour of information

awareness - for example number of searches - change by one unit. The intercept, , is the

value of log odds when the number of searches equals to zero.

189
 *
4. Given a certain number of searches, , if there is a need to estimate not the odds in favour

of the level of awareness but the probability of level of awareness. This can be done once the

estimates and are available.

The linear probability model assumes that is linearly related to , while the logit model assumes

that the log of odds ratio is linearly related to .

In this study a logit model is used because it has several relevant features that support this study and

because the data being used is appropriate for a logit model which provides statistically acceptable

results. It transforms the dichotomous dependent variable from the 0 to 1 range to a continuous

variable which varies between -∞ to +∞. The problems of out of range estimates are therefore

avoided. Moreover, the method is simple to analyse and easy to interpret. The parameter estimates of

the logit model are asymptotically normal, efficient and consistent. Hence, the regression t-tests and

other similar tests can be applied. Figure 7.1 illustrates the probability density function (PDF) and

the cumulative distribution function of the logit model. These graphs are used to provide an indicator

of the probability distribution of the outcome variable in the logit model. In this case it is the

awareness of buyers. The vertical axis provides the probability and the horizontal axis provides the

mean of the corresponding variable. Figure 7.1 is used as an example to show the properties of the

logit model.

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PROBABILITY DENSITY FUNCTION

0.75

( ) 0.5

0.2

0.00

-3 -2 -1 0 1 2 3

Figure 7.1: Probability density function of logit distribution (Greene, 2012)

Figure 7.1 illustrates the importance of determining the sample selection procedures where the mean

( ) and the standard deviation ( ) change the dispersion pattern so as the distribution around the tails

changes. Higher mean and the tight standard deviations account for tight spread but not around the

zero which is similar to the standard normal distribution. However, for interpretation accuracy and

credibility, tighter distributions with low standard deviations are preferred compared to highly

dispersed distributions. Hence, it is advisable to maintain the variance ( ) of the analysis at a

minimum level.

Conceptually, the probit model behaves in a similar manner to the logit model. However technically

it follows the normal distribution instead of the logistic distribution of the logit models. That is, the

probit model possess the inverse of the cumulative distribution function (CDF) of the normal

distribution (0,1). Furthermore, probit models are applicable where the response variable

distribution is lognormal.
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In a common rationalisation the dependent variable of the logit model can only take 0 and 1

dichotomous response values and no in-between response values. However, the probit model is

sometimes used where responses are measured in percentage terms given it has the property of

containing in-between values between 0 and 1. That is, it has a continuous, not discrete property.

Hence, in this study, the home owners’ satisfaction is determined by an ordered probit model given

the rank ordered data can have the property of continuity. For the information awareness, the

suitable specification is the logit distribution because the respondents were asked whether they were

aware or not - a discrete response.

In this survey around 17% (Table 5.6) of respondents were aware of the road corridor expansions, of

the likely impacts of the land resumptions and possible negative externalities. Hence, it can be

concluded that there is a possibility of information asymmetry occurring as discussed in Akerlof’s

lemon model. This condition can be further explained using the control site analysis in Chapter Six.

In the analysis relating to information awareness several determinants are considered which affect

consumers’ preferences relating to searching behaviour of housing locations. Also some indicators

that can capture the level of accuracy of information are used by buyers in order to achieve a higher

level of utility given the level of verification of the information used for the transaction. This

condition is controlled by using the type/source of the information buyers used for purchasing the

current house.

The survey shows that 29.65% of respondents were ‘first time’ buyers in EPAC corridor compared

to 32.5% in the EPK corridor. Further, 79.5% of respondents reported they were ‘out of area buyers’

in EPK corridor as against 78.5% for the EPAC. This reveals little prior knowledge about the local

area that they are moving into.

192
In the selected sample, 17% indicated that they were migrants. It can reasonably be assumed here

that their level of knowledge of the area is likely to be lower compared to Australians, especially

those living in areas where announcements of proposed corridors have been made.

Education and income levels of the majority of respondents range from average to high. Hence, it

can be assumed that buyers have undertaken the necessary property searchers (and of the areas)

before making purchasing decisions as would be expected from rational consumers. Furthermore,

54% of consumers (home buyers) in this sample were assisted by an agent (buyer agent or seller

agent). This high level is obviously related to the fact that 79% of the sample were from the ‘out of

area’ and given the presence of first time and ‘migrant’ home buyers in the sample. The logit

analysis shows a positive association between use of an agent and information awareness. However,

there is a significant negative correlation between awareness and the interaction between out of area

and agent variable. This may be due to out-of-area buyers not being attracted to the best real estate

services in a given area. The models and their results are discussed in detail in Sections 7.3 to 7.5.

7.3 RESULTS AND DISCUSSION OF INFORMATION AWARENESS

MODEL

Awareness, a dichotomous variable, was used as the dependent variable. Identified independent

variables were drawn from the literature review to capture their effect on the awareness of buyers.

The OUTOFAREA variable is used to find out the effect on buyers when they were not resident in

the area when purchasing the house. It is hypothesised that being a non-resident has a negative

impact on the awareness of the buyer. As well, first time buyers are hypothesised to have minimal

information about the housing market. Therefore, FIRSTTIME is used to obtain the effect of first

time buyers on awareness. The expected sign is negative. It is clear that the number of searches can

193
also have a significant impact on buyers’ awareness. This is because the more the buyers search for

information about the property and the area, the higher the information they receive about the

housing market and its environs.

Use of a real estate agent can have a mixed impact on awareness given the level of disclosure of each

agent. Hence, it is used because it is important as a determinant of the buyers’ level of knowledge.

Education and age are used as further variables to capture buyers’ experience and decision-making

ability and which can also have an important influence on buyers’ awareness. The time of purchase

is also important in relation to the level of accessibility to information about the WBTN scheme.

Therefore the YR variable is used to obtain the time of purchase.

One of the most important variables in this analysis is SOURCE. It determines the source of the

information buyers obtained from the options available. In the questionnaire different sources of

information are provided and ordered according to the perceived verifiability. These aspects have not

been addressed in the economics literature except in a few financial studies (Jullian and Marriotti,

2006; Yosha, 1995). The level of income and the status of migration are included given they can

clearly have a significant impact on buyers’ awareness. Table 7.1 describes the variables used for the

information awareness model.

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Table 7.1: Definitions of variables used in information awareness model
Variable Description Expected Sign

OUTOFAREA If the buyer is from out of the area to the relevant suburbs -
of house situated: 0 = no , 1 = yes.
AWARENESS If the buyer is previously aware of the road corridor N/A
expansions: 0 = no, 1 = yes.
FIRSTTIME If the buyer is first time buyer: 0 = no, 1 = yes. -
SEARCH Number of search done before buying the current +
property.
AGENT If the buyer assisted by an agent: 0 = no, 1 = yes. + /-
EDU The level of education: an ordered likert scale from 1 – 8. +
AGE Age of the respondent. A likert scale corresponding to the -
decade of born that ranges 1 – 8.
YR Year of purchase of the property. +/-
X Interaction between out of area and agent -
SOURCE The source of the information they used before buying the +
property. A likert scale from 1 – 6 indicating the level of
verifiability of the source.
INCOME Weekly income: a likert scale corresponding to the +
income ranging from 1 – 8.
MIGRANT If the buyer is a migrant: 0 = no, 1 = yes. -

7.3.1 FUNCTIONAL FORM OF THE LOGIT MODEL

Equation (7.7) shows the functional form applied for the logit model in this study. The dependent

variable (Y) is awareness:

Pr( = 1| ) = + + + + +

+ + + + + +

+ (7.7)

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7.3.2 DESCRIPTIVE STATISTICS

Table 7.2 shows the descriptive statistics of the variables used in the information awareness model.

It shows the mean of the OUTOFAREA area variable is 0.71 and its standard deviation is 0.456. The

AWARENESS variable has a mean of 0.1 and the standard deviation is 0.301. The SEARCH and

AGENT variables have means of 10.47 and 0.58 respectively. Some variables such as SEARCH

provide the highest standard deviation (13.78) compared to the mean and hence caution needs to be

exercised in interpreting the results given its spread over the mean is comparatively high. The

variable X which is the interaction of OUTOFAREA and AGENT have means of 0.94 and 0.76.

Table 7.2: Descriptive statistics of the information awareness model

Variable Mean Std. Dev. Min Max

OUTOFAREA 0.71 0.456 0 1

AWARENESS 0.1 0.301 0 1
FIRSTTIME 0.29 0.518 0 1
SEARCH 10.47 13.777 0 100
AGENT 0.58 0.496 0 1
EDU 4.69 1.894 0 8
AGE 5.29 1.358 1 8
YR 2006.71 5.925 1977 2012
X 0.94 0.76 0 1
SOURCE 4.17 1.517 0 6
INCOME 4.52 2.253 0 8
MIGRANT 0.19 0.394 0 1

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7.3.3 LOGISTIC REGRESSION OF INFORMATION AWARENESS (LOG-
ODDS)

Table 7.3 shows the log-odds of the estimated logit model. All the variables show the expected signs

except for OUTOFAREA. It was hypothesised that buyers from an area outside the road corridor

sites (EPAC and EPK) would have less knowledge about the current activities related to WBTN

developments. The interaction between OUTOFAREA and the AGENT has a negative impact.

Hence, it can be assumed that OUTOFAREA buyers do not have effective communication with the

agents regarding key issues relating to the area. As expected, the variable SOURCE has a positive

sign although it is not significant. This may be due to the buyers being highly dependent on an

agent’s assistance in finding proper housing locations regardless of other information sources. Also

there can be issues relating to provision of reliable information. However, it is clear from the real

estate property market literature that most agents are seller agents (who represent the seller, not the

buyer). Income of the buyer has the expected positive sign.

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 Table 7.3: Log-odds of information awareness model

Variable Coefficients Standard Error Z value

SEARCH 0.088***** 0.038 2.31
AGENT 1.387*** 1.077 1.29
AGE -0.346 0.399 -1.75
FIRSTTIME -1.653**** 1.04 1.579
OUTOFAREA 1.570 2.650 1.13
SOURCE 0.205 0.320 0.45
INCOME 0.008 0.301 0.20
YR 0.101 0.110 0.87
X -1.871** 1.850 -1.5
EDU 0.131 0.337 0.39
MIGRANT -0.285 1.230 -0.03
Note: ***** Significant at 5%, **** Significant at 7%, *** Significant at 11%, ** Significant at
12%, * Significant at 14%10.

7.3.4 LOGISTIC REGRESSION OF INFORMATION AWARENESS

(MARGINAL EFFECTS)

Table 7.4 shows the marginal effects derived from the awareness model. The significant variables

are SEARCH, AGENT, AGE and the interaction term between AGENT and the OUTOFAREA. The

analysis shows that the marginal effects of SEARCH are significant at 5% probability level. This

result indicates that searching for information would increase customer awareness by 0.4%, a small

impact. The awareness of buyers who used an agent for their transaction was 7.2% above the buyers

who did not use an agent. The interaction between out-of-area buyers and the agent reveals a

negative effect on the buyer’s awareness. Hence, the relationship between buyer and the seller

(agent) has a detrimental effect on non-locals and migrants. As expected income and education

(EDU) have a positive correlation with awareness.

10
The signs for the significance levels applied in Table 7.3 and 7.4 is different from the rest of the thesis.

198
Table 7.4: Marginal effects of the information awareness model
Variable Marginal Effect Standard Error Z-Value
SEARCH 0.0041 0.002 2.01*****
AGENT 0.072 0.072 1.7***
FIRSTTIME -0.085 0.057 -1.50
AGE -0.015 0.016 -1.86****
OUTOFAREA 0.112 0.093 1.15
SOURCE 0.009 0.013 0.65
INCOME 0.002 0.012 0.20
YR 0.004 0.005 0.88
X -0.084 0.054 -1.54**
EDU 0.004 0.016 0.23
MIGRANT -0.013 0.056 -0.03
PSEUDO-R2 0.29
LR chi2(11) 19.30
LOG LIKELIHOOD -22.64
Note: ***** Significant at 5%, **** Significant at 7%, *** Significant at 11%, ** Significant at
12%, * Significant at 14%.

7.4 ORDERED PROBIT MODEL

Ordered probit models have features that can analyse ordinal dependent variables. This analytical

technique allows researchers to obtain the different levels of utility each economic agent obtains

depending on the factors making up their socioeconomic status and which can be controlled for.

Also the flexibility of distributional assumption of this model helps in the interpretation of the

coefficients. Hence in this study it is applied to analyse the level of satisfaction of the housing

service a buyer received. The house buyers’ satisfaction is therefore evaluated as an ordered

variable. However, it is assumed that a considered satisfaction level is not twice as satisfied as its

immediate lower level and is therefore a non-linear relationship.

199
In this study, the consumers’ satisfaction levels of the housing location are mainly assessed. This is

because the results from the hedonic and awareness models have shown that residents’ who

experience different levels of utility are evidently depending on the location they choose to reside in.

This approach is also a means of confirming the results obtained from the awareness model set out in

Chapter Four. The overall satisfaction with housing location as measured by various criteria

including closeness to green space, noise levels, unobstructed views, and closeness to major

transport facilities, are discussed in detail in this chapter.

The use of logit and probit models is surveyed by Hoetker (2007) who found that their use has been

minimal in the last few decades. He pointed out that even in published papers the interpretation of

coefficients is usually incorrect. However lack of appreciation of logit and probit models by

researchers was put down to the difference evident from the OLS models. In this context Hoetker

identified four critical issues relating to logit and probit models: interpreting coefficients, modelling

interaction between variables, comparing coefficients between groups, and measures of mode fit. He

further noted that by giving the probability density function as the source, the effect of change in

independent variables (coefficients) on probability depends on the initial probability of the event.

The modelling in this section is an ex-post analysis of the residents’ satisfaction of their transaction

decisions after they purchased the property given certain characteristics that affect the people’s

willingness to stay in a particular household. Using a probit model an analysis is made of residents’

knowledge of the announcements/information concerning the negative environmental effects due to

the road expansion and their contemporaneous satisfaction with the housing service received.

As proposed in the buyers’ decision making model, it is assumed that the buyers’ knowledge of the

negative environmental externalities has a lag effect on their true valuation of property prices.
200
Hence, in this probit estimation, residents’ satisfaction of the house is estimated on the basis that

buyers’ information on the negative effects has a lag and contemporaneous effect on their decision-

making process. It is equally assumed that buyers’ contemporaneous knowledge when they bought

the property has a minimal effect on their decision to purchase the property. It is further assumed

that today’s valuation of their property is based on the lag information through their experiences

over past residency and that contemporaneous knowledge can have a significant impact on their

current decisions. Therefore the data was collected so as to obtain residents’ preferences for the

current location and identify factors that are influencing residents’ decision-making.

In the theoretical explanation of the probit model, it is assumed that the ordered dependent variable

(in this case residents satisfaction level) is subjected to the unobserved utility function, , which is

called a latent variable (Gujarati, 2003). Essentially, the latent variable is a function of a vector of

independent variables. In the probit model the probability of occurrence of a particular event is

measured by the levels of these independent variables, which otherwise assign a threshold, ∗ , for the

event to occur.

The dependent variable in this model is an ordered scale (categorical) according to the buyer’s

revealed satisfaction level. In these circumstances the most suitable model specification is the

ordered probit model (Quddus et al., 2002). The methodology is set out below commencing from

Equation (7.8) and is applied for the ordered probit model. It is hypothesised on the basis of a latent
∗
variables’ structure. The relationship in Equation (7.8) provides the latent variables ( ) and its

predictors ( ):

201
 ∗
= + (7.8)

∗
Pr( = | ) = ( ) = Pr( ≤ ) = Pr( ≤ + )

= ( + ) (7.9)

In the above model is the realisation of the latent variable, which measures the satisfaction level

, of residents, which is determined by , a matrix of independent variables. are coefficients of

the relevant independent variables which are to be estimated. In this study the impact of perceived

negative externalities due to the announcements of proposed road corridor expansion is expressed in

terms of residents’ satisfaction of the housing service they receive. Hence their perceived disutility

with respect to the road expansion disamenity is determined in terms of the categorical variable of

satisfaction. The satisfaction levels are ordered as none, fair, good and high. It is assumed that where

there are severe effects from the negative externalities, residents will be highly dissatisfied. Hence,

the responses for the ordered latent variable in Equation (7.10) are shown as:

∗
0 ≤ 0( )
∗
1 0< ≤ ( )
= ∗ (7.10)
2 < ≤ ( )
∗ (ℎ )
3 ≤ ℎ

Here threshold are limits for the intensity of negative externalities and are unknown

parameters to be estimated.

Figure 7.2 illustrates the distribution of the ordered probit model that is conceptually similar to the

model applied in this chapter. However, in this study only four levels of rank orders are considered.

One of the main advantages of using the ordered probit model is due to the ease of interpretation of

202
the coefficients and the ability to obtain the differences of the marginal effects for the changes in

outcomes (levels of satisfaction).

ORDERED PROBIT DISTRIBUTION

0.4

0.3

0.2

0.1

y=1 y=2 y=3

y=0 y=4

− − − −
Figure 7.2: Ordered probit distribution (Greene, 2012)

In the Equation (7.9), is the standard normal variable with zero mean and variance and

represent the cumulative distribution function. Also is the standard normal cumulative distribution

function which can be expressed as a function of .

Equation (7.11) is based on the probability theory discussed in Equations (7.8), (7.9), (7.10) and

Figure 7.3. It is applied in the estimation to assess buyers’ satisfaction for the current location:

203
 Pr( = | ) = + + + +

+ + + + +

+ + + + + +

+ + (7.11)

7.5 RESULTS AND DISCUSSION OF THE SATISFACTION MODEL

This section provides the results of the ordered probit model used to elicit buyers’ current level of

satisfaction. The definitions of the variables are given in Table 7.5. In this analysis some of the

variables are used in the awareness analysis. Further, it is assumed that the level of awareness can

have a significant impact on the satisfaction of buyers. The RELATIVES variable is used to capture

the effect of relatives in the area on buyers’ satisfaction, given some people like to have their

relatives in the community close to them. DUMMY compares the satisfaction of residents between

the larger corridor and the smaller corridor. CBD variable measures the effect of distance to the

Brisbane CBD for the satisfaction of buyers.

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Table 7.5: Definitions of the variables of satisfaction model
Variable Definition Expected Sign
SATISFACTION An ordered variable which measures the ordinal level N /A
of satisfaction
AWARENESS A dichotomous variable which measure the level of +
awareness of WBTN
FIRSTTIME A dummy variable for first time buyers. 0 = first time -
buyer: 1 = repeat buyer
AGE Age of the respondent -
INCOME The level of income measures in 1 – 8 likert scale +/-
RELATIVES Presence of relatives in the area : 0 = No, 1 = Yes +/-
DISTANCE Distance to the transport corridors (km) +
BD Number of bedrooms +
BTH Number of bathrooms +
CARPORT Presence of a carport: 0 = No, 1 = Yes +/-
SIZE Size of the house (square metres) +
PARK Distance to the recreational park (km) -
SMAR Distance to the supermarket (km) +/-
SCHOOL Distance to the school (km) +/-
DUMMY A dummy which separate the larger and smaller -
CBD Distance the Brisbane CBD (km) +/-
CPC Inflation adjusted property price +/-

There are several studies conducted in the literature in relation to the ordinal structure of consumers’

choices. The studies that are relevant in the statistical analysis with conceptual importance to this

study are discussed here. However, in other studies, ordered logit/probit models are used (see,

voters’ preferences, Koop and Poirier, 1994; business management – Robson and Bennett, 2000;

injury severity – Abdel-Aty, 2003).

205
Hausman and Ruud (1987) showed the usefulness of rank ordered logit models in analysing

consumer evaluations of attributes of goods and services. They asserted that ranked data create more

information from a survey compared to available data collection methods. Hence, by using studies

based on rank ordered logit models, the researcher can produce a small sample size thus saving costs

on sampling. However, one drawback of rank ordered logit is that when there are several choices to

be selected, respondents tend to choose the top ranked choices compared to lower ranked choices.

For their study, they used the subject of mobile radio vs. cellular radio for communication with rank

orders for each attribute. They found that the cellular radio has features that satisfy the consumers in

comparison to the mobile radio.

Using a similar methodology to this study, Lu (1999) examined the satisfaction of residents using an

ordered probit model. He stated that ordered logit model is more suitable for satisfaction models

because of the ordered nature of satisfaction and due to the OLS models remain less useful in this

case. Further, Lu noted that residential satisfaction is a complex condition that is determined by

several features such as environmental and socio-economic variables.

Such complexity is related to the fact that housing is invariably the largest consumption item in the

lifetime of a person and is the place where people find refuge, rest and find satisfaction (Adam,

1984). Given its importance residential satisfaction has a long-standing research history similar to

other disciplines such as sociology, psychology, planning and geography (Baillie and Peart, 1992;

Bruin and Cook, 1997; Canter and Rees, 1982; Cutter, 1982; Galster and Hesser, 1981; Levy-

Leboyer, 1993; Lu, 1999; Marans and Rodgers, 1975; McFadden, 1978; Nathan, 1995; Weidmann

and Anderson, 1985), and is a noteworthy objective of a housing policy that intends to provide better

housing services for every citizen. Weidemann and Anderson (1985) have shown the importance of

206
considering house as a “living place” rather than its structural characteristics. Weidemann and

Anderson further suggested that a multifaceted approach to housing valuation is more important than

a single faceted valuation because its ultimate utility derives from satisfaction to dwellers.

Residential satisfaction is also a significant factor in housing demand and mobility factors. If an

individual is dissatisfied with the current location, they decide to move to a new location. Adam

(1984), McFadden (1978) and Lu (1999) pointed out that, even though there is a significant amount

of literature related to housing satisfaction, some research showed conflicting and inconsistent

results. These differences may be due to the differences in samples and the way data were analysed.

The ordered logit model Lu applied is similar to the one used in this study.

Household satisfaction from current situations arises from their perceptions of desired and actual

situations of the outside environment. Furthermore, a typology that describes the life course changes

(culturally defined age categories which an individual passes by in the life time) and housing needs

states that individuals become dissatisfied due to a mismatch of housing and the environment with

residential needs and aspirations.

7.5.1 SATISFACTION OF HOME BUYERS: AN ORDERED PROBIT

ANALYSIS

Table 7.6 describes the descriptive statistics of the variables used for the satisfaction analysis from

which a general view of the dispersion of variables used for the analysis can be obtained. This

information is also useful in the interpretation of the coefficients. According to the descriptive

statistics, the SATISFACTION variable has a mean of 2.5 and its standard deviation is 0.81. The

AWARENESS variable has a mean of 0.1 and its standard deviation is 0.3. First-time buyers can

also have an influential effect on satisfaction indicated by the fact that FIRSTTIME variable has a

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mean of 1.69 and a standard deviation 0.5. The distance to the transport corridor (DISTANCE) has a

mean of 1.58 and standard deviation is 0.89. The DUMMY variable has a mean of 0.61 and its

standard deviation is 0.49. They show more or less even distribution around their mean values.

Therefore the results obtained in the regressions are assured for their robustness.

Table 7.6: Descriptive statistics

Variable Mean Std. Dev. Min Max
SATISFACTION 2.5 0.81 0 3
AWARENESS 0.1 0.3 0 1
FIRSTTIME 1.69 0.5 0 1
AGE 4.99 1.51 1 8
INCOME 4.8 2.08 1 8
RELATIVES 1.63 0.48 1 3
DISTANCE 1.58 0.89 0.08 4.5
BD 3.6 0.84 2 6
BTH 1.8 0.75 1 4
CARPORT 0.81 0.39 0 1
SIZE 723.83 364.14 235 3473
PARK 1.43 0.88 0.06 3.5
SMAR 2.75 1.25 0.7 6
SCHOOL 1.73 0.74 0.2 3.3
DUMMY 0.61 0.49 0 1
CBD 11.29 3.63 6.1 17.8
CPC 530616.4 178113.6 331520 1600000

Table 7.7 shows the percentage of respondents with their satisfaction levels for each category. The

satisfaction levels show the existing aesthetic and environmental quality in the area with most buyers

having higher scores for each attribute, accounting for the overall satisfaction. It shows that the area

has more green spaces which can enrich the aesthetic value of houses. Also, their satisfaction with

the closeness to the major transport corridor is at a desirable range. Given residents have higher

satisfaction for all the environmental attributes, any expansion of the existing road corridors is likely

to generate a substantive negative impact at the expense of local environmental quality.

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Respondents rated closeness to green space as ‘high’ (47%) and unobstructed view as medium

(33%). Thirty six percent of respondents rated “Quietude” as ‘high’ while 37% rated closeness to

transport corridors as ‘very high’. Hence, it can be deduced that residents who live within the

optimum distance from the transport corridors enjoy a higher level of quietude.

Table 7.7: Descriptive statistics of satisfaction levels

Attribute Percentage of Respondents
Low Fair Medium High Very High

Closeness to green space 0 4 19 47 30

Quietude 9 17 22 36 16
Unobstructed view 11 11 33 29 16
Closeness to recreational park 2 5 21 41 31
Closeness to major transport 4 8 23 28 37

Table 7.8 shows the marginal effects of each determinant of the satisfaction model used in the study.

These variables were selected through a scrutinised study of the related literature. The important

variables show a significant impact on the level of satisfaction.

The satisfaction categories are derived from the information collected from the survey under

satisfaction section. The overall satisfaction levels in the satisfaction section of the questionnaire are

used as the basis for this. As given in Table 7.7, low overall satisfaction is used as the base value (0

or none/dissatisfied). Fair overall satisfaction is used as the first category or outcome (1) in the

analysis. Moderately satisfied or the good category which is outcome (2) is formed by the medium

overall satisfaction. Finally the outcome (3) or highly satisfied is formed by the combining high and

very high satisfaction levels as one category.

209
According to the results, the awareness of residents can have a positive impact on their level of

satisfaction given the level of satisfaction varies from -13% to 21% when the corresponding

awareness level moves from 0 to 1. This is a significant impact on the level of awareness and on the

satisfaction of the residents (house buyers). It may be due to the situation where buyers are more

aware of the current conditions and the expansion of the road corridors, and take appropriate

decisions to minimise the negative impacts of keeping their utility (satisfaction) at a desirable level.

It is evident from the regression results that when age increases, the level of satisfaction increases

from -5% to 6.7%, showing a significant impact on their level of utility. As expected, income has a

negative impact on the level of satisfaction beyond a certain level. This is because when income

increases by one category in a 1 to 8 scale, the level of satisfaction decreases by 2% to -2%

confirming the diminishing marginal utility of income. This condition is discussed in-depth in

happiness research (see, for example, Easterlin, 1974: 1975; Oswald, 1997). Even though the income

variable is not significant, it has the correct sign. As expected, distance to transport corridors also

has a significant impact on the level of satisfaction of residents.

The results also show that the level of satisfaction increases from -5% to 7% as the distance to the

major transport corridors increases by one unit. This is one of the main expected results of this study.

It can therefore be concluded that well informed residents and those who live farther from transport

corridors experience a higher utility. The distance to recreational park and distance to school have a

negative impact on the level of satisfaction of the residents. Satisfaction level increases by -14% to

20% when the distance to the park increases by one kilometre. This may be due to the localised

effects of noise and other disturbances since it is similar to distance to schools. With regard to

distance to school, the satisfaction level increases from -13% to 19% when distance to school

210
increases by one percent. The distance to a supermarket has a negative impact on the level of

satisfaction which decreases from 23% to -33% when distance increases by one percent. This may be

due to supermarkets being an important public utility in meeting daily needs. Thus being farther

from a supermarket can generate a negative impact on residents’ utility. Also it is important to

mention that DUMMY variable shows an insignificant increase of satisfaction of living in the

EPAC. The sign of the variable is negative for the low and the moderate satisfaction levels. The sign

is positive for the high satisfaction but it is insignificant. This shows that being in the larger corridor

compared to the smaller corridor does not significantly impact on the level of satisfaction. This also

confirms the findings in Table 6.3 in Chapter Six and Table 7.11 in this chapter.

211
Table 7.8: Marginal effects of the satisfaction model
Variable Marginal Effects of Marginal Effects of Marginal Effects of

Outcome 1 Outcome 2 Outcome 3

Coefficient Z Coefficient Z Coefficient Z

AWARENESS -0.13***** -2.45 -0.08***** -1.66 0.21***** 2.29
FIRSTTIME 0.06 0.86 0.03 0.82 -0.09 -0.86
AGE -0.05***** -2.02 -0.02**** -1.68 0.067***** 2.05
INCOME 0.02 0.96 0.008 0.91 -0.02 -0.96
RELATIVES -0.07 -1.06 -0.03 -1.0 0.11 1.06
DISTANCE -0.05*** -1.60 -0.02* -1.45 0.07*** 1.65
BD -0.04 -0.79 -0.02 -0.76 0.07 0.79
BTH 0.03 0.47 0.01 0.46 -0.04 -0.47
CARPORT 0.00 0.01 0.00 0.01 0.00 0.01
SIZE 0.00 -0.58 0.00 -0.57 0.00 0.58
PARK -0.14***** -2.64 -0.06***** -2.00 0.2***** 2.73
LOGSMAR 0.23***** 2.78 0.10***** 2.03 -0.33***** -2.85
LOGSCHOOL -0.13*** -1.73 -0.05* -1.53 0.19*** 1.76
DUMMY -0.11 -0.90 -0.05 -0.96 0.16 0.93
CBD 0.02*** 1.69 0.01* 1.50 -0.04*** -1.72
CPC 3.52e-07 1.46 1.53e-07 1.34 -5.05e-07 -1.49
PSEUDO-R2 0.157
LOGLIKELIHOO -67.90
2
LR Chi 25.26 0.08
Note: ***** Significant at 5%, **** Significant at 7%, *** Significant at 11%, ** Significant at
12%,* Significant at 14%.

7.6 HP REGRESSION WITH INFORMATION VARIABLES

The following regression in Table 7.9 shows the combination of variables that affect the property

price. The variables belong to two categories. They are structural characteristics and the information

effects. The main focus in this analysis is to control for the information effects that can have an

impact on the property prices. The information variables were obtained from the survey. This

212
method of hedonic analysis covers an important gap in the hedonic literature that has not been

addressed widely. Table 7.10 provides the descriptive statistics.

Table 7.9: Definitions of variables

Variable Definition Expected Sign
BTH Number of bathrooms +
BD Number of Bedrooms +
LOGDIS Log of the distance to the transport corridors (km) +
CARPORT Presence of a carport +/-
SIZE Size of the land (Square metres) +
AGE Age of the house +/-
MHI Median household income( Aus $) +
PARK Distance to park (km) +/-
SCHOOL Distance to school (km) +/-
SMAR Distance to supermarket +/-
DUMMY Dummy for two corridors: 0=small corridor, -
1= large corridor
OUTOFAREA Dummy for buyer from difference area to current -
location : 0= No, 1=Yes
FIRSTTIME Dummy for first time buyers: 0= No, 1 = Yes -
SEARCH Number of search before buying the house -
AGENT Use of an agent for buying the house: 0 = No, +
1 = Yes
EDU Level of education of the buyer: Likert 1-7 +/-

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7.6.1 FUNCTIONAL FORM OF THE COMBINED HP MODEL

= + + + + + + + +
+ + + + + +
+ + + (7.12)

Table 7.10 shows the descriptive statistics for the variables selected for the combined hedonic

analysis with information variables. The structural characteristics do not show much of the same

variation from the mean values when compared to the variables used in the Chapter Six. However

this regression has a lower number of observations compared to the HP analysis in Chapter Six.

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 Table 7.10: Descriptive statistics of the variables

Variable Mean Std.Dev Min Max

CPC 529482.9 176617.9 331520 1585000
BTH 1.803922 0.7451389 1 4
BD 3.598039 0.835592 2 6
DIS 1.573706 0.8924867 0.08 4.5
CARPORT 0.8137255 0.3912507 0 1
SIZE 724.549 362.4011 235 3473
AGE 1971.029 14.33921 1930 1990
MHI 5625.416 1279.437 2693.2 9069.2
PARK 1.448627 0.8907912 0.06 3.5
SCHOOL 1.730392 0.7397871 0.2 3.3
SMAR 2.752941 1.24222 0.7 6
DUMMY 0.6176471 0.4883619 0 1
OUTOFAREA 0.6568627 0.4771014 0 1
AWARENESS 0.127451 0.3351243 0 1
FIRSTTIME 1.705882 0.4790303 0 1
SEARCH 10.7451 13.90825 0 100
AGENT 1.303922 0.5225455 0 1
EDU 4.892157 1.934097 0 8

The importance of the following regression is it uncovers the impact of buyer’s information level on

the property prices. The expected results in the Table 7.9 are tested in this regression. The structural

characteristics have expected signs similar to the Chapter Six. However in this regression much

attention is not paid to the structural and locational characteristics as they have been discussed in

Chapter Six. The salient variables in this regression are OUTOFAREA, FIRSTTIME, SEARCH,
215
AGENT and EDU given they are the indicators of the information effects. They have the expected

signs and significance levels in an acceptable range. Property price increases as the out of area

buyers increases in the sample. This can be attributed to the fact that out of area buyers are more

willing to pay for a house in comparison to the local buyers. The MWTP is AUS$ 63614.35. This

may be due to buyers from the other areas not having more information about the area. Further when

the number of searches done by each buyer increases by one unit, the MWTP decreases by AUS$

2114.91. The FIRSTTIME variable has the expected sign although it is significant at the 15%. The

LOGDIS variable is significant at 11%. However, when the nature of the variable is examined it is

shown to have a one-tail t-test and the significance level rises to 5%. Hence buyers’ MWTP

increases by AUS$ 28190.45 when the distance from the transport corridors is increased by 1%.

216
Table 7.11: HP regression results with information variables
Variable Coefficient t-Value
BTH 16938.61 0.62
BD 59323.67***** 2.39
LOGDIS 28190.45** 1.62
CARPORT -31884.29 -0.83
SIZE 153.8579***** 3.44
AGE 740.1875 0.61
MHI 27.05618** 1.63
PARK -25286.56 -1.13
SCHOOL -3060.29 -0.13
SMAR 17688.71 1.24
DUMMY -142181.9***** -3.56
OUTOFAREA 63614.35**** 1.94
FIRSTTIME 37978.67 1.21
SEARCH -2114.914**** -1.84
AGENT 9202.205 0.32
EDU 6454.965 0.82
R2 0.50
Adj.R2 0.41

217
7.7 CHAPTER SUMMARY

This chapter discussed the factors influencing information awareness and satisfaction levels of

buyers. In order to analyse the effects of information asymmetry on buyers’ decision-making,

information awareness and satisfaction levels of buyers were identified as key factors. It was found

that a significant number of buyers were not aware of the road corridor improvements and related

impacts on residential settings. A logit model was used to analyse the level of awareness of buyers.

It was found in the awareness model that the number of searches, use of a real estate agent for the

transaction and the age of the buyer have significant impacts on the level of awareness. The marginal

effects were 0.41%, 7.2% and -1.5% respectively. Among other significant variables, the interaction

between out of area buyers and the real estate agents were found to be important. One of the

important hypothesis was that the source of the information could have a significant impact on the

level of awareness. However, this analysis indicates it is not significant, but has the correct sign. In

the buyers’ satisfaction analysis, there are several significant variables namely level of awareness,

level of education, age of the respondent, income, distance to park and supermarket. Distance to

major transport facilities, schools and to the CBD were also significant.

According to the combined HP model in Table 7.11 there is a significant impact from the

information that buyers hold. It shows that the less the buyer is aware about the WBTN expansion

the more his/her MWTP. This has an important policy implication in relation to the compensation

programs.

218
CHAPTER EIGHT

CONCLUSION

8.0 INTRODUCTION

This chapter consists of four sections. The first section summarises the key findings of the thesis.

Empirical results on the basis of the theoretical developments are discussed in section two. Section

three provides the main impacts of the WBTN scheme and policy implications which are relevant to

achieving socially optimal outcomes. Section four identifies limitations in the current literature

concerning the HP methodology and the way in which the finding of this thesis can make an

important contribution to overcoming them.

8.1 KEY NOTES OF FINDINGS AND DISCUSSION

The findings of this research cover four key areas. The first is identification of the need for

improvements to the HP methodology to accommodate information asymmetries. The second is

empirical evidence from the real estate property market survey which incorporates information

effects into the HP model. The third is to impart valuable insights into the nature of welfare effects

due to the expansion of road corridors under the conditions of information asymmetry. The fourth is

the assessment of buyers’ satisfaction levels with respect to the current housing services derived

from the survey.

Chapter Two outlines the unique nature of the Brisbane real estate markets in two proposed corridor

expansion WBTN scheme. The nature of the expansions and the proposed road corridors are

described in the Chapter Two providing an overall view of the WBTN.

219
Chapter Three discusses the theoretical underpinnings of the HP model used to analyse the survey

data and the contribution Akerlof’s lemon model makes to the analysis. The important issue created

by the presence of asymmetries of information for the use of the HP model is raised.

In Chapter Three a literature review reveals the estimation and development of the necessary

analytical methods of the new HP model approaches which are needed in the assessment of buyers’

level of awareness. In particular, the HP model’s flawed assumption of perfect information is

examined. Noted is that in real life situations, as in the thesis study of the Brisbane real estate

market, this condition rarely if ever holds. The asymmetry of information between buyers and sellers

can be taken to be the norm rather than the exception. Methodological improvements to the HP

model are therefore proposed. The empirical results of combined HP analysis in Chapter Seven

(Table 7.11) further confirms the need of an alternative estimation of HP implicit prices. Noted are

various HP models used to estimate welfare effects. The quantitative outcomes were analysed to

provide better policy criteria for welfare measurements of the affected parties using the information

obtained from the survey. In particular, attention is placed on improving the existing methods of HP

spatial analysis in Chapter Four. Analysed are several models developed by Neelawala et al. (2013)

which are similar to the thesis analytical framework.

The key contribution to the literature on spatial analysis of HP models is made by distinguishing

between different coordinate systems, specifically the Cartesian coordinate system and geographic

coordinate system. The importance of using the Cartesian coordinate system for smaller geographic

area is highlighted in Chapter Four. The salient feature is that it improves the robustness of welfare

calculation. Cartesian coordinates are shown to be substantially more accurate and econometrically

convenient to estimate even in the absence of GIS technical know-how. The importance of this

220
contribution is illustrated by the Mount Isa study (Neelawala et al., 2013) which shows a 32%

underestimation of the distance variable using the Geographic coordinate system compared to the

Cartesian coordinate system. For the Kholo study (Neelawala et al., 2013) the MWTP differential

between approaches in terms of property prices is estimated to be AUS$ 2099. Clearly this level of

welfare miscalculation can have a detrimental impact on affected parties where policy formulation is

based on incorrect data. The application of the Cartesian methodology to the WBTN empirical

analysis therefore represents a significant methodological innovation.

Chapter Five outlines the appropriate HP model’s environmental variables developed for the

surveys. These variables were chosen to capture their effect on house prices and included distance to

the proposed road corridors, distance to public utilities such as schools and supermarkets, and

distance to environmental amenities such as recreational parks. As well, the HP model provided the

guidelines to collect the necessary socio-economic data for the thesis.

The impact from road corridor expansions and announcements and the comparisons with the control

site are discussed in the Chapter Six. The novel approach developed for the HP spatial model

through the use of Cartesian coordinates provides highly efficient estimates. These estimates clearly

showed the extent to which houses located close to transport corridors suffer a bigger price impact

(price drop) compared to houses that are farther away, ceteris paribus.

Given that the HP model’s assumptions of full information are likely to provide less informative

explanations, alternative solutions were sought. In Chapter Seven information awareness and

satisfaction models have been developed for this purpose. In addition, a rational model for buyers’

decision-making process is used to better demonstrate the impact of information availability on

buyers’ decision-making. This model mediates between Akerlof’s lemon model and the information
221
awareness model developed in Chapter Seven - an approach which is supported by a number of

previous studies (see, for example, Jullien and Marrotti, 2006; Yosha, 1995). A further refinement is

the acknowledgement of the theoretical importance of the time dimension with respect to before and

after hedonic models as shown by Pope (2008). According to Akerlof’s theory, the unobservable

feature is the quality of the product which market prices do not provide a good measure of.

However, average price movements are shown to provide some indication.

The WBTN empirical analysis in Chapter Six focuses on the welfare effects on the affected

community close to road corridors. In this, two key effects are analysed. They are closeness to the

corridor, and magnitude of the expansion which is still in an announcement phase. Hence, all the

welfare effects are due to the information effects generated by the announcements. The size of the

effects is highlighted by comparing the welfare effects attached to the control site (which better

reflects the pre-announcement conditions of the study site). The distance price discount for the study

site is AUS$ 318 per metre compared to AUS$ 0.037 for the control site. The welfare effects due to

the announcements is shown to be around AUS$ 317 per metre which is a significant amount when

individual effects are aggregated. As expected, the larger corridor (Everton Park to Albany Creek)

option is subject to a larger impact compared to the smaller corridor.

As an important policy suggestion for the affected groups such as out of area buyers and first time

buyers, a prioritizing method for compensation programs is shown to be a viable methodology if

based on the HP valuation. Such compensation programs for the residential property issues have

been widely discussed (Tietenberg & Lewis, 2000; Tietenberg & Folmer, 2003).

In developing the information awareness and satisfaction models, certain variables affecting the

awareness and satisfaction of buyers are used. Factors that significantly affect the awareness of the
222
buyer are shown to be the age of the buyer, the number of searches, and use of an agent as a

facilitator. Except for the age of the buyer, the other significant variables have a positive impact on

awareness. While it was expected in the study that source of information variable would play vital

role in increasing the awareness of buyers it proved not to be significant. Indicated by the study was

that when the level of verifiability attached to the source of the information increased it did not add a

positive significant impact on awareness. This indicates a need for policy intervention through

mandatory disclosure irrespective of buyers request for the information.

8.2 AKERLOF’S LEMON MODEL AND RESIDENTIAL PROPERTY

MARKET

In this thesis Akerlof’s lemon model is used as a benchmark for the analysis of the information

asymmetries in the residential property market. The intention is to use market observations in a

setting that allows for information asymmetry to be put into a more comprehensible theoretical

framework. The goal is not to prove a theory using evidence but rather to use as a yard stick of

measurement. In Chapter Six the market observations of average price variation and the pattern of

properties coming to sale near the roads between control site and study site indicate the presence of

uncertainty and an asymmetry of information rather random behaviour in economic agents (buyers

and sellers). Therefore in Chapters Five to Seven the factors affecting information asymmetry are

discussed in some detail.

The regression results of the HP model in Chapter Seven gives the implicit prices for information

asymmetries affecting buyers. Thus it is shown that out of area buyers are more willing to pay for a

property compared to the local buyers by AUS$ 68365.09. This is because out of area buyers do not

have enough information to make rational decision compared to the local buyers. Further, when the

223
level of awareness goes up, buyer’s MWTP drops significantly to AUS$ 71065.72. It can equally be

shown that first time buyers are more willing to pay compared to the repeat buyers. The MWTP is

AUS$ 45655.65 indicating the significant impact of information on buyer’s MWTP. This provides

strong evidence of the need to take these factors into consideration when compensation programs are

being designed.

8.3 MAIN CONCLUSIONS AND POLICY SUGGESTIONS

The key issues raised in this study is the common problem that compensation for loss of property

prices due to a construction project does not cover comprehensively the whole period in which they

are affected. This study shows that the price impacts on properties are likely to begin from the time

projects are announced (although they are likely to be more pronounced should the project go

ahead). Moreover, the study shows that community agitation may have an impact on property prices

by creating uncertainty among buyers by more fully exposing the adverse effects of proposed

project.

Thus even if there is compensation for property owners for the adverse effects of a development, it is

unlikely to apply to the loss of property prices incurred between the period when the project is

announced and when it is commenced. The thesis surveys of the two corridors in southeast

Queensland clearly indicate the presence of such a post announcement reduction in property prices

and which are not compensated for. The study therefore reveals a need for relevant government

authorities to address the issue of the effects on house prices due to announcements of proposed

projects. In this context there are the added complicating issue that some projects can take decades to

materialise (and, indeed, may not materialise at all) but will nevertheless have a negative effect on

the prices of residential properties in the proposed project areas.

224
This problem places a focus on the level of information accessed by buyers in the period when an

impending development has been announced but not commenced. This research confirms that buyers

who had better information buy better quality houses. Thus the satisfaction model shows the buyers

who were most satisfied were those who were more aware of information regarding the WBTN

scheme. Furthermore, according to the awareness model used, buyers who are more aware of the

new proposed road corridor tend to choose housing locations farther from it. However this research

also indicates that buyers who had lower levels of education, or were out of area buyers (including

migrants) were disadvantaged given they were less informed about the road corridor expansion. This

suggests that on equity grounds mandatory disclosure laws if introduced could greatly benefit the

less informed in a property purchase transaction.

In addition to the regression results of the survey data, further evidence is found which indicates that

the act of proposing new developments such as the WBTN are likely to impact on property prices.

Firstly, announcements such as WBTN are found to induce an increase in the frequency of houses

being put up for sale in the affected areas. This supports the original hypothesis that sellers anticipate

a devaluation of house prices due to the anticipated impact of large proposed projects. This

phenomenon has a similar characteristic with the financial market phenomenon called “flight-to-

quality” which describes investors’ tendency to sell what they perceive as high-risk investments and

purchase safer investments.

Secondly communities in project affected areas are likely to protest when project announcements

with negative impacts are made. Such protests dwell on the expected disamenities which flow from

the project once the work commences and once the traffic corridor is completed. Disamenities, as the

literature review showed, result in lower prices of the affected properties. Because of publicity on

225
adverse effects generated by large projects such as WBTN, it is assumed in the analysis that buyers

become more aware of the relevant issues and consequently are willing to pay less for properties

particularly where the road corridor expansions are large. The regression results (LOGDIS and

DUMMY) confirms this hypothesis as well as the associated assumption that buyers will pay a

larger amount to be farther from established and proposed corridors.

8.4 AVENUES FOR FURTHER RESEARCH

The findings of this research are mainly based on the cross-sectional data with time dimension

analysis. This is because it is the only data available for an analysis of this nature. Furthermore, the

data available for consecutive years are incomplete. This prevents the undertaking of a repeat sales

or a panel data analysis. Therefore, further research (e.g. repeat sales and panel data analyses) can be

undertaken when databases such as RP Data collect such data and make them available to the public.

This is because repeat sales studies can accommodate for the time varying and fixed characteristics

simultaneously that determine the property prices. Time varying covariates where a repeat sales

method is used can control for the socio-economic and environmental characteristics that change

over time and which is reflected in the property prices.

226
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APPENDICES
1.0 Appendix

This appendix contains the questionnaire used for the Everton Park to Kedron road corridor.

1.1 Appendix

This appendix contains the questionnaire used for the Everton Park to Albany Creek road
corridor.

2.0 Appendix

This appendix provides the paper prepared for the Kholo haulage route issue.

What impact does an announcement of a proposed quarry road have on property values? An
empirical analysis

3.0 Appendix

This appendix provides the paper prepared for the Mt Isa mining issue.
The impact of mining and smelting activities on property values: a study of Mount Isa city,
Queensland, Australia.

4.0 Appendix

This appendix contains the reminder postcard sent to the addresses who did not send the
questionnaire within a month.

246
Appendix 1.0 Your Number:

QUESTIONNAIRE
Household survey of residents’ knowledge of and perceptions about the
Everton Park to Kedron bus corridor.
Note: The questionnaire should be completed by the principal bill paying member of the
family

The Study
A PhD study is being undertaken at Queensland University of Technology (QUT) examining residents’
knowledge of and perceptions about the proposed Everton Park to Kedron bus corridor and Everton Park
to Albany Creek bus and rail corridor improvement and expansion plans under the Western Brisbane
Transport Network (WBTN) scheme. Your address has been selected from a list of addresses obtained from a
publicly available real estate database called Old Listings.
Your anticipated participation is very important to us as it enables us to examine the possible effects on
nearby properties (houses) due to the proposed scheme. We provide more information about the WBTN
scheme overleaf and as an attachment. Your input will be strictly confidential. Your response will be a
coded statistic and combined with those of other residents who take part in the study. In this way, your
anonymity is assured. Furthermore, the data will be used only for PhD research purposes.
Your participation only involves you answering the attached questionnaire relating to residents’ knowledge
of and perceptions about the proposed Everton Park to Kedron bus corridor and related issues. Some
questions may not appear to be directly relevant to the road corridors but nonetheless become useful in our
analysis. This specially relates to socio-economic questions and other background questions.
Your participation in this survey is entirely voluntary. Those volunteers completing the questionnaire will
be entered into a prize draw which will give away three prizes worth a total of $2,300. They are worth
$1000 (first prize), $800 (second prize) and $500 (third prize). The prize draw will be held a month after
the completion of the survey.

We would be grateful if you could complete this survey form and return it within three weeks.

If you have general enquiries regarding this questionnaire please call Mrs Jane Johnston (external liaison
officer) on 3371 4641. For specific questions regarding the questionnaire you may contact by email or via
phone:
Professor Clevo Wilson (Principal Supervisor)
School of Economics and Finance
QUT Business School
BRISBANE QLD 4000
Email: clevo.wilson@qut.edu.au
Telephone: Office – 3138 4228
THANK YOU FOR YOUR COOPERATION!

Note: More information about the study is provided in the PARTICIPANT INFORMATION FOR QUT
RESEARCH PROJECT form (next page)
247
 PARTICIPANT INFORMATION FOR QUT RESEARCH PROJECT

Determining the level of information of property buyers in relation to the Western Brisbane Transport
Network scheme
QUT Ethics Approval Number 1200000545
RESEARCH TEAM
PhD student: Prasad Neelawala, PhD student
PhD Supervisors: Clevo Wilson, Professor and Louisa Coglan, Senior Lecturer
School of Economics and Finance – QUT Business School
Queensland University of Technology (QUT)
DESCRIPTION
This study is being undertaken as part of a PhD study undertaken at the QUT. The study examines the level
of information of property buyers at the time of purchase of the property in relation to the proposed road
corridors under the Western Brisbane Transport Network scheme.
You are invited to participate in this project because you have been identified as a resident in the selected
local area.
PARTICIPATION
Your participation in this survey is entirely voluntary. Your decision to participate, or not participate, will in
no way impact upon your current or future relationship with QUT.
Participation will involve completing a questionnaire that will take approximately 30 minutes of your time.
Questions will include what is your level of knowledge about the Western Brisbane Transport Network
scheme.
If you agree to participate you do not have to complete any question(s) that you are uncomfortable
answering.
Those volunteering to complete the attached questionnaire will be automatically entered into a prize draw
which will give away three prizes. They are worth $1000 (first prize), $800 (second prize) and $500 (third
prize).
EXPECTED BENEFITS
Apart from completing PhD study, it is expected that the outcomes of this study will be useful for policy
decision making, especially in relation to the development of infrastructure projects. A copy of the results of
the study will be made available to you on request.
RISKS
There is no risk involved with this project except your mere involvement with this survey.
PRIVACY AND CONFIDENTIALITY
All comments and responses are anonymous and will be treated confidentially. The names of individual
persons are not required in any of the responses.

248
CONSENT TO PARTICIPATE
The consent of participation will be by answering the attached questionnaire and posting it in the pre-paid
envelope provided.
QUESTIONS / FURTHER INFORMATION ABOUT THE PROJECT
Further information regarding the study can be obtained from the principal supervisor and external liaison
officer for this study.
Professor Clevo Wilson 07 31384228 clevo.wilson@qut.edu.au
Mrs Jane Johnston (external liaison officer) 07 3371 4641
CONCERNS / COMPLAINTS REGARDING THE CONDUCT OF THE PROJECT
QUT is committed to research integrity and the ethical conduct of research projects. However, if you do
have any concerns or complaints about the ethical conduct of the project you may contact the QUT
Research Ethics Unit on 3138 5123 or email ethicscontact@qut.edu.au. The QUT Research Ethics Unit is not
connected with the research project and can facilitate a resolution to your concern in an impartial manner.
Thank you for helping with this research project. Please keep this sheet for your information.

Basic information about Western Brisbane Transport Network (WBTN) scheme

The Western Brisbane Transport Network (WBTN) scheme intends to increase and expand the number of
lanes in selected existing road corridors and add new rail corridors to cater for increased road and rail
transport. Under this scheme 22 major projects will be undertaken, (see, p.3).

Two of the projects proposed under the WBTN scheme are the expansion and improvement of the road
corridors of Everton Park to Kedron bus corridor and Everton Park to Albany Creek bus and rail corridors.
The expansion and increasing of lanes would sometimes result in land resumption and potential impact on
the property market. Hence it is important to evaluate the residents’ attitudes towards the corridor
improvements and expansion which is the intention of this PhD study.

The Everton Park to Kedron road corridor [Option 20 shown in map, page 4]

This proposed corridor improvement is coupled with the arterial upgrade and the inclusion of an additional
motorway link. It is basically aimed at reducing congestion and providing additional space for cycling and
walking. It is nearly 4 kilometres in length. The project, it is hoped, will reduce over-crowding on passenger
transport services, reduce peak hour congestion and freight movement costs.

Community feedback (as mentioned in Queensland Transport and Main Roads department’s WBTN strategy
report, May 2009) was undertaken for this option covering the entry and exit points of the corridors,
alignment and preferred mode of transport. The development of the existing four lane (two left and two
right lanes) road from Everton Park to Kedron includes the expansion of the road to add one bus lane as well
as a cycling and walkway. This expansion directly affects six suburbs. They are Everton Park, Stafford,
Alderley, Grange, Gordon Park and Stafford Heights. These improvements have been aimed at improving
easement transport and reducing travel time. This corridor will also provide public transport facilities from
the Western suburbs to the Northern busway from the West. The corridor improvement will add a new

249
arterial with a bus lane and a new tunnel road under the existing Stafford Road that links the North-West
transport corridor and the airport link.

Figure 1: Map showing proposed changes to Stafford Road.

Note: Also see the information map below
More information on the WBTN can be found on the following website: www.tmr.qld.gov.au

250
A brief summary of the Western Brisbane Transport Network scheme

251
Proposed road corridors in WBTN (Department of Transport and Main Roads, 2009)

252
 Your Number:

Respondents’ Level of Knowledge about the Localised Effects of the

WBTN Scheme

General questions about the Western Brisbane Transport Network scheme

1. For how long have you lived at the present address?

Since ..............................................
2. If you have moved to the current address after year 2000 what was the postcode or the name of the
previous suburb you lived in?
........................................................................................................................................................
3. Were you aware of the Western Brisbane Transport Network scheme at the time of purchasing the
current property (house)? Please tick.
Yes No Unsure
4. If Yes, what was the level of knowledge? Please tick.

Nil Low Fair High

5. If Yes to question 3, when did you first get to know about the Western Brisbane Transport Network
scheme (e.g. government announcements and/or word of mouth)? Indicate the approximate year or
how many years ago.
Approximate year ............................ or How many years ago ............................
6. If Yes to Q(3), were you aware of the proposed arterial upgrade activities of Stafford Road under the
Western Brisbane Transport Scheme at the time of purchasing this property? Please tick.
Yes No Unsure
7. If Yes to Q(3), what is your current level of knowledge about the proposed road development activities
on Stafford Road ? Please tick.

Nil Low Fair High

8. If Yes to Q(3), were you aware of any potential land resumption and other activities for the proposed
road corridor for the Stafford Road expansion? Please tick.

Yes No Unsure
If Yes, for how long? Approximate years ............................

253
9. What are the sources of information you used to find information when you purchased the current
property? Please tick.

Word of mouth
Newspaper
Internet
Real estate agent
Brisbane City Council
Other: 1. ………................................. 2. ………................................. 3. …….…................................
10. Were you a first time home buyer or a repeat home buyer when you purchased the current property?
Please tick.

First time Repeat Other ............................................................

11. Approximately how many properties did you inspect before buying your current house?
Please state the number.
……………………………………………………………………..
12. Approximately how many properties did you inspect from the areas shown in the map (Figure 1, page
2) before buying your current house? Please state the number.

……………………………………………………………………..
13. Did you get the help of a real estate agent?
Yes No

Satisfaction
What is your current satisfaction with the following characteristics in relation to your house? Please tick.
Location Characteristics Very
Low Fair Medium High High

Closeness to green surroundings

Noise levels

Unobstructed views

Closeness to recreational parks

Closeness to major transport networks

Overall satisfaction for the current location

254
1. Are the location characteristics shown above the same as when you purchased the house? In other
words did you expect (tick the box):

More satisfaction Less satisfaction More or less the same

2. Do you have a mortgage?

Yes No

3. If Yes, what amount does it fall into (fortnightly)? Please tick the relevant range of amount.

Less than $700

$701 - $800
$801 – 900
$901 –1000
$1001 -1100
More than $1100

Demographic Information

1. What is your year of birth? Please tick the relevant date range. Before 1930

1930-1939

1940-1949

1950-1959

1960-1969

1970-1979

1980-1989

255
2. What is your highest educational qualification? Please tick. Primary only

Secondary schooling

Trade certificate

Diploma

University degree

Post graduate

Other .………………………....................

3. Please indicate how many household members (including yourself)

fall into each of the following age and gender categories.
Male
Female
Less than 18 years
18–65
65+

4. What is your household’s gross weekly income?

Please tick the relevant income range. Less than $500

$500 – 999

$1000 – 1499

$1500 – 1999

$2000 – 2499

$2500 – 2999

$3000 –3499

256
 State of Ethnic Composition
1. Are you a migrant or have you spent a considerable time of your life overseas before coming to
Australia?

Yes No

If Yes, what is your country of origin? ............................................................................

2. How many of your close friends / relatives live in your current neighbourhood?
All Most Some None
3. What was your main reason or reasons to move to your current place of residence?
You may tick more than one box.

I. To be closer to work – easier commute for either you or another household member

II. To be closer to school – easier commute for either you or another household member

III. New job/ job transfer for either you or another household member

IV. Member(s) of household moving out of the home / needed smaller home

V. Wanted newer / bigger / better home

VI. Wanted to own home

VII. Moving to Queensland

VIII. Personal circumstances (please specify)

1 ……………………………………….……………………………………….……………………………………….

2 ……………………………………….……………………………………….……………………………………….

IX. Other (please specify)

1 ……………………………………….……………………………………….……………………………………….

2 ……………………………………….……………………………………….……………………………………….

3 ……………………………………….……………………………………….……………………………………….

257
 Additional Information about Your House

1. Do you have an unobstructed open area view from ground level fromthe front of your property?

Yes No

2. Do you have an unobstructed open area view from ground level from the back of your property?

Yes No

3. Does the property face main road from the front?

Yes No

4. What is your best approximation for the age of the house?

1. Less than 10yrs

2. About 10yrs

3. About 20yrs

4. About 30yrs
5. About 40yrs
6. About 50-60yrs
7. Other

5. Do you park your vehicle on the nature strip?

Yes No Sometimes

6. Do you have a carport(s) or garage?

Yes No

258
 Location Attributes

1. Does the location of your house have green surroundings within a kilometre distance?

Yes No

2. How do you rate the level of vehicle noise from the surroundings (from Stafford Road)?

Yes No Medium High

3. Does your house face another property / apartment?

Yes No

259
 The Prize Draw

As mentioned in the introduction, those volunteers completing the questionnaire will be entered into a prize
draw which will give away three prizes worth a total of $2,300.
They are: First prize $1000
Second prize $800
Third prize $500

Once the completed surveys have been received (within three weeks), the prize draw will be held. This will
be within a month after the completion of the survey.

In order to communicate regarding the prize draw, your address is needed. The name is optional.

Address: The Resident (name optional) …………………………………………………………...............................

…………………………………………………………..................................................................................

…………………………………………………………..................................................................................

THANK YOU FOR YOUR TIME IN COMPLETING THIS SURVEY

A reply-paid envelope is provided for your convenience to return the completed survey
Please return completed survey within 3 weeks

260
 Your Number:
Appendix 1.1

QUESTIONNAIRE
Household survey of residents’ knowledge of and perceptions about the Everton Park
to Albany Creek bus corridor.
Note: The questionnaire should be completed by the principal bill paying member of
the family

The Study
A PhD study is being undertaken at Queensland University of Technology (QUT) examining residents’
knowledge of and perceptions about the proposed Everton Park to Kedron bus corridor and Everton Park
to Albany Creek bus and rail corridor improvement and expansion plans under the Western Brisbane
Transport Network (WBTN) scheme. Your address has been selected from a list of addresses obtained from a
publicly available real estate database called Old Listings.
Your anticipated participation is very important to us as it enables us to examine the possible effects on
nearby properties (houses) due to the proposed scheme. We provide more information about the WBTN
scheme overleaf and as an attachment. Your input will be strictly confidential. Your response will be a
coded statistic and combined with those of other residents who take part in the study. In this way, your
anonymity is assured. Furthermore, the data will be used only for PhD research purposes.
Your participation only involves you answering the attached questionnaire relating to residents’ knowledge
and perceptions about proposed Everton Park to Albany Creek bus and rail corridors and related issues.
Some questions may not appear to be directly relevant to the road corridors but nonetheless become useful
in our analysis. This specially relates to socio-economic questions and other background questions.Your
participation in this survey is entirely voluntary. Those volunteers completing the questionnaire will be
entered into a prize draw which will give away three prizes worth a total of $2,300. They are worth $1000
(first prize), $800 (second prize) and $500 (third prize). The prize draw will be held a month after the
completion of the survey.
We would be grateful if you could complete this survey form and return it within three weeks.
If you have general enquiries regarding this questionnaire please call Mrs Jane Johnston (external liaison
officer) on 3371 4641. For specific questions regarding the questionnaire you may contact by email or via
phone:

Professor Clevo Wilson (Principal Supervisor)

School of Economics and Finance
QUT Business School
BRISBANE QLD 4000
E-mail: clevo.wilson@qut.edu.au
Telephone: Office – 3138 4228
THANK YOU FOR YOUR COOPERATION!

Note: More information about the study is provided in the PARTICIPANT INFORMATION FOR QUT
RESEARCH PROJECT form (next page).
261
 PARTICIPANT INFORMATION FOR QUT RESEARCH PROJECT

Determining the level of information of property buyers in relation to the Western Brisbane Transport
Network scheme
QUT Ethics Approval Number 1200000545
RESEARCH TEAM
PhD student: Prasad Neelawala, PhD student
PhD Supervisors: Clevo Wilson, Professor and Louisa Coglan, Senior Lecturer
School of Economics and Finance – QUT Business School
Queensland University of Technology (QUT)
DESCRIPTION
This study is being undertaken as part of a PhD study undertaken at the QUT. The study examines the level
of information of property buyers at the time of purchase of the property in relation to the proposed road
corridors under the Western Brisbane Transport Network scheme.
You are invited to participate in this project because you have been identified as a resident in the selected
local area.
PARTICIPATION
Your participation in this survey is entirely voluntary. Your decision to participate, or not participate, will in
no way impact upon your current or future relationship with QUT.
Participation will involve completing a questionnaire that will take approximately 30 minutes of your time.
Questions will include what is your level of knowledge about the Western Brisbane Transport Network
scheme.
If you agree to participate you do not have to complete any question(s) that you are uncomfortable
answering.
Those volunteering to complete the attached questionnaire will be automatically entered into a prize draw
which will give away three prizes. They are worth $1000 (first prize), $800 (second prize) and $500 (third
prize).
EXPECTED BENEFITS
Apart from completing PhD study, it is expected that the outcomes of this study will be useful for policy
decision making, especially in relation to the development of infrastructure projects. A copy of the results of
the study will be made available to you on request.
RISKS
There is no risk involved with this project except your mere involvement with this survey.
PRIVACY AND CONFIDENTIALITY
All comments and responses are anonymous and will be treated confidentially. The names of individual
persons are not required in any of the responses.

262
CONSENT TO PARTICIPATE
The consent of participation will be by answering the attached questionnaire and posting it in the pre-paid
envelope provided.
QUESTIONS / FURTHER INFORMATION ABOUT THE PROJECT
Further information regarding the study can be obtained from the principal supervisor and external liaison
officer for this study.
Professor Clevo Wilson 07 31384228 clevo.wilson@qut.edu.au
Mrs Jane Johnston (external liaison officer) 07 3371 4641
CONCERNS / COMPLAINTS REGARDING THE CONDUCT OF THE PROJECT
QUT is committed to research integrity and the ethical conduct of research projects. However, if you do
have any concerns or complaints about the ethical conduct of the project you may contact the QUT
Research Ethics Unit on 3138 5123 or email ethicscontact@qut.edu.au. The QUT Research Ethics Unit is not
connected with the research project and can facilitate a resolution to your concern in an impartial manner.
Thank you for helping with this research project. Please keep this sheet for your information.

263
Basic information about Western Brisbane Transport Network (WBTN) scheme
The Western Brisbane Transport Network (WBTN) scheme intends to increase and expand the number of
lanes in selected existing road corridors and add new rail corridors to cater for increased road and rail
transport. Under this scheme 22 major projects will be undertaken, (see, p.3).

Two of the projects proposed under the WBTN scheme are the expansion and improvement of the road
corridors of Everton Park to Kedron bus corridor and Everton Park to Albany Creek bus and rail corridors.
The expansion and increasing of lanes would sometimes result in land resumption and potential impact on
the property market. Hence it is important to evaluate the residents’ attitudes towards the corridor
improvements and expansion which is the intention of this PhD study.

The Everton Park to Albany Creek bus and rail corridors [Option 5 and Option 22 shown in page 4 map]
According to the proposed scheme, one rail line will be added adjacent to the Old Northern road and the
existing road corridors are expanded. Community feedback (as mentioned in Queensland Transport and
Main Roads department’s WBTN strategy report, May 2009) was undertaken for this option. The main
objectives are to reduce travel time, reduce the traffic and make transport more attractive. The suburbs
under this development plan are Everton Park, Albany Creek, Everton Hills and McDowall. The basic
intention of the improvement of this corridor is to facilitate bus and rail transport by adding new rail link and
adding new lanes to the existing road corridors. The visual, environmental, noise and air pollution impacts
on nearby properties of the four affected suburbs are expected to be greater when compared to the Everton
Park to Kedron option where the corridor expansions are smaller. This corridor improvement will provide a
transport link to join the North Western suburbs to Enoggera road hoping to reduce dependence on private
vehicle use.

Figure 1: Map showing proposed changes to Old Northern Road.

Note: Also see the information map below
More information on the WBTN can be found on the following website:
www.tmr.qld.gov.au

264
A brief summary of the Western Brisbane Transport Network scheme

265
Proposed road corridors in WBTN (Department of Transport and Main Roads, 2009)

266
 Your Number:

Respondents’ Level of Knowledge about the Localised Effects of the

WBTN Scheme
General questions about the Western Brisbane Transport Network scheme

1. For how long have you lived at the present address?

Since ..............................................
2. If you have moved to the current address after year 2000 what was the postcode or the name of the
previous suburb you lived in?

..........................................................................................................................................................
3. Were you aware of the Western Brisbane Transport Network scheme at the time of purchasing the
current property (house)? Please tick.

Yes No Unsure

4. If Yes, what was the level of knowledge? Please tick.

Nil Low Fair High

5. If Yes to Q(3), when did you first get to know about the Western Brisbane Transport Network scheme
(e.g. government announcements and/or word of mouth)? Indicate the approximate year or how many
years ago.

Approximate year ............................ or How many years ago ............................

6. If Yes to Q(3), were you aware of the proposed changes to Old Northern Road under the Western
Brisbane Transport Scheme at the time of purchasing this property? Please tick.

Yes No Unsure

7. If Yes to Q(3), what is your current level of knowledge about the proposed road and rail development
activities to the Old Northern Road? Please tick.

Nil Low Fair High

8. If Yes to Q(3), were you aware of any potential land resumption and other activities for the proposed
Old Northern rail and bus corridors? Please tick.

Yes No Unsure
If Yes, for how long? Approximate years ............................

267
9. What are the sources of information you used to find information when you purchased the current
property? Please tick.

Word of mouth
Newspaper
Internet
Real estate agent
Brisbane City Council
Other: 1. ………................................. 2. ………................................. 3. …….…................................

10. Were you a first time home buyer or a repeat home buyer when you purchased the current property?
Please tick.

First time Repeat Other ............................................................

11. Approximately how many properties did you inspect before buying your current house?
Please state the number.
……………………………………………………………………..
12. Approximately how many properties did you inspect from the areas shown in the map (Figure 1, page
2) before buying your current house? Please state the number.

……………………………………………………………………..
13. Did you get the help of a real estate agent?
Yes No

Satisfaction
What is your current satisfaction with the following characteristics in relation to your house? Please tick.
Location Characteristics Very
Low Fair Medium High High

Closeness to green surroundings

Noise levels

Unobstructed views

Closeness to recreational parks

Closeness to major transport networks

Overall satisfaction for the current location

268
 4. Are the location characteristics shown above the same as when you purchased the house? In other
words did you expect (tick the box):

More satisfaction Less satisfaction More or less the same

5. Do you have a mortgage?

Yes No

6. If Yes, what amount does it fall into (fortnightly)? Please tick the relevant range of amount.

Less than $700

$701 - $800
$801 – 900
$901 –1000
$1001 -1100
More than $1100

Demographic Information

1. What is your year of birth? Please tick the relevant date range. Before 1930

1930-1939

1940-1949

1950-1959

1960-1969

1970-1979

1980-1989

269
2. What is your highest educational qualification? Please tick. Primary only

Secondary schooling

Trade certificate

Diploma

University degree

Post graduate

Other .………………………....................

3. Please indicate how many household members (including yourself)

fall into each of the following age and gender categories.
Male
Female
Less than 18 years
18–65
65+

4. What is your household’s gross weekly income?

Please tick the relevant income range. Less than $500

$500 – 999

$1000 – 1499

$1500 – 1999

$2000 – 2499

$2500 – 2999

$3000 –3499

270
 State of Ethnic Composition

1. Are you a migrant or have you spent a considerable time of your life overseas before coming to
Australia?
Yes No

If Yes, what is your country of origin? ........................................................................

2. How many of your close friends / relatives live in your current neighbourhood?

All Most Some None

3. What was your main reason or reasons to move to your current place of residence?
You may tick more than one box.
X. To be closer to work – easier commute for either you or another household member

XI. To be closer to school – easier commute for either you or another household member

XII. New job/ job transfer for either you or another household member

XIII. Member(s) of household moving out of the home / needed smaller home

XIV. Wanted newer / bigger / better home

XV. Wanted to own home

XVI. Moving to Queensland

XVII. Personal circumstances (please specify)

1 ……………………………………….……………………………………….……………………………………….

2 ……………………………………….……………………………………….……………………………………….

XVIII. Other (please specify)

1 ……………………………………….……………………………………….……………………………………….

2 ……………………………………….……………………………………….……………………………………….

3 ……………………………………….……………………………………….……………………………………….

271
 Additional Information about Your House

1. Do you have an unobstructed open area view from ground level from the front of your property?

Yes No

2. Do you have an unobstructed open area view from ground level from the back of your property?

Yes No

2. Does the property face main road from the front?

Yes No

3. What is your best approximation for the age of the house?

5. Less than 10yrs

6. About 10yrs

7. About 20yrs

8. About 30yrs
5. About 40yrs
6. About 50-60yrs
7. Other

4. Do you park your vehicle on the nature strip?

Yes No Sometimes

5. Do you have a carport(s) or garage?

Yes No

272
 Location Attributes

1. Does the location of your house have green surroundings within a kilometre distance?

Yes No

2. How do you rate the level of vehicle noise from the surroundings (from Old Northern Road)?

Yes No Medium High

3. Does your house face another property / apartment?

Yes No

273
 The Prize Draw

As mentioned in the introduction, those volunteers completing the questionnaire will be entered into a prize
draw which will give away three prizes worth a total of $2,300.
They are: First prize $1000
Second prize $800
Third prize $500

Once the completed surveys have been received (within three weeks), the prize draw will be held. This will
be within a month after the completion of the survey.

In order to communicate regarding the prize draw, your address is needed.

The name is optional.

Address: The Resident (name optional) …………………………………………………………...............................

…………………………………………………………..................................................................................

…………………………………………………………..................................................................................

THANK YOU FOR YOUR TIME IN COMPLETING THIS SURVEY

A reply-paid envelope is provided for your convenience to return the completed survey
Please return completed survey within 3 weeks

274
Appendix 2.0

What impact does an announcement of a proposed quarry road have on property values? An
empirical analysis
Prasad Neelawala, Clevo Wilson and Max Brigg

Prasad Neelawala, School of Economics and Finance, Queensland University of Technology,

Brisbane QLD 4001.

Clevo Wilson, School of Economics and Finance, Queensland University of Technology, Brisbane
QLD 4001.
Tim Robinson, School of Economics and Finance, Queensland University of Technology, Brisbane
QLD 4001.

Corresponding Author
Clevo Wilson, School of Economics and Finance, Queensland University of Technology, Brisbane
QLD 4001. E-mail: clevo.wilson@qut.edu.au

275
Abstract
The paper investigates the relationship between the announcement of a proposed haul route and its
impact on nearby property values in Queensland, Australia. A large number of studies have been
conducted using the Hedonic Price (HP) method to show the impact of environmental disamenities
on property prices, but to our knowledge this is the first time that evidence is provided on the impact
of an announcement of a proposed road on property values. For this purpose a hedonic model is used
which includes a vector of structural and neighbourhood characteristics and a vector of
environmental attributes as explanatory variables. The value of the property is the dependent
variable which has been adjusted for inflation. For this purpose real estate data, as well as secondary
data from the Australian Bureau of Statistics, are used. The results of the regression analysis suggest
that the marginal willingness to pay to be farther from the proposed route is AUS$ 17,020 per
kilometre. The distance variable is significant at two per cent level probability level. Other
significant factors that influence house prices are household size, number of bathrooms, number of
bedrooms, size of the land, and year of sale dummies. The results of the study have important
implications for policy decision-making.

JEL Codes: R40. R41, Q51, Q53

Keywords: Hedonic price model, environmental disamenities, marginal willingness to pay,

proposed haul route, spatial autocorrelation, spatial models.

276
1. Introduction
Since Rosen’s (1974) seminal work a wide variety of theoretical and empirical literature have
explored the role of housing attributes in consumer decision-making (Taylor, 2008). With reference
to environmental externalities many papers have also been published that have considered the spatial
effects on property values. Examining announcements and their effects is important given their
potentially adverse impacts on property values. Needless to say, preliminary announcements such as
to establish quarry and haul routes are likely to result in welfare losses to residents in the affected
areas whether or not the project goes ahead. Hedonic property (HP) analysis is an ideal tool since
such an approach can analyse the spatial effects of proposed projects on property values.

In this paper, the announcement of a proposed haul route to a proposed quarry in Ipswich,
Queensland, Australia is examined (see Figure 2.1). The proposed quarry was first announced in
1996 by the Queensland State government and the subsequent haul routes thereafter. Since the first
announcement by the State government, two major reports have been published documenting the
nature of the impacts of the quarry and the haul routes. The reports clearly specify the
environmental and health impacts of the haul routes, based on the volume of expected daily heavy
traffic on the haul routes transporting the quarried resources. Furthermore, since the announcement
of the quarry and the haul routes, community groups have agitated strongly against the project
proposal giving further publicity to the environmental and health effects.

Hence, the hypothesis in the paper is that a proposed project of this nature with negative externalities
that are likely to prevail for the life span of the project, and the subsequent public opposition to the
project, create uncertainty in the property market of the affected area. It is hypothesised that the
uncertainty created impacts on properties closer to the haul routes and the quarry than those farther
from the proposed project. This hypothesis is tested using real estate data which are supplemented
with Australian Bureau of Statistics (ABS) data and Google Maps. The Spatial Mixed Model results
show that property buyers in the area are paying AUS$ 17,020 per kilometre to be away from the
recommended haul route that is likely to be used if the proposal to establish the quarry goes ahead.

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2. Study area and the proposed Kholo haul route in Queensland, Australia

For this study, three suburbs (Chuwar, North Ipswich, and Tivoli) that fall within the responsibility
of the Ipswich City Council, Queensland, Australia are selected to determine the effect of the
proposed construction of the KHR on property prices. These suburbs were selected because of the
spatial importance to the proposed route. Furthermore, these three suburbs have a high population
density which means the available sample of real estate data is adequate to undertake this study. The
choice of suburbs is also seen as appropriate given the announcement of the proposed haul route is
likely to have an impact on the welfare of a large number of residents in the affected areas.

Of the several routes proposed to transport the quarry material (see Figure 2.1), the Department of
State Development (2003) report commissioned for this project clearly identifies Option H (a
combination of Routes 4 and 20) as the route that is likely to cause the least damage to residents of
the affected area. In Figure 2.1, this is shown as route 1. It passes through the suburbs of Kholo,
Chuwar, North Ipswich (upper part), and North Tivoli. The suburb of Kholo is excluded from the
hedonic analysis because it is sparsely populated and hence no real estate data relevant for this study
are available. Regarding the selection of this route, the Department of State Development (2003)
report states:

“This report is the final phase of the investigation. The preferred route based on non-price criteria is
Option H (Route 20 and 4). This is because it will have:

• Least impact on the ecological/biodiversity of the area;

• Least severance and property impact on existing and future communities;

• Least noise impact on existing and future communities; and

• Least visual impact on existing and future communities.

These factors combined make up an assessment of the potential impacts of the haul routes on the
overall amenity/character of the area for existing and future communities. From the assessment
undertaken, it is evident that Option H will have the least impact on the overall character/amenity of
the area.”

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The main resource to be quarried is hardrock which is located on the boundary of the Ipswich City
Council and the Brisbane City Council. The quarrying of hardrock was first mooted by the
Queensland state government in 1996. However, the individual quarrying project requires detailed
environmental impact assessment and approval of the Ipswich and Brisbane City Councils
respectively. This hardrock resource has been identified as an important economic asset since its
presence is expected to provide economic benefits to the area and is expected to be one of the main
raw materials needed in large quantities for the development of infrastructure in South East
Queensland.

Since the announcement of the proposed quarry in 1996, the Queensland state government has
closely investigated the hardrock resource project and has made several announcements including
the Queensland Department of State Development (2003) report to ascertain the socio-economic
damage and the environmental impact of the project. For this purpose, the Kholo Creek Hardrock
Resource Advisory Panel was established in 1996. The panel was set up to assist in the identification
and resolution of issues relating to the resource and was chaired by a representative of the
Department of State Development. It included representatives from the local community, the quarry
industry, local government and Queensland state government agencies.

Frequent community consultations have been conducted by different community groups since the
announcement of the project. A major report was also commissioned by community groups to
ascertain the socio-economic damage and environmental impact of this project (see, for example,
SIRA Inc, 2003). The SIRA Inc. (2003) report identifies the major socio-economic damage and
environmental impact to the areas affected by the proposed project.

Some of the likely impacts discussed by both the Department of State Development (2003) and the
SIRA Inc. (2003) reports were: air pollution, noise impacts, property devaluation, land resumption,
safety issues for nearby residents, health impacts, visual impacts and impacts on the local flora and
fauna. The main concerns regarding the haul route are over the construction period and
transportation of the quarry material during the lifespan of the quarry project.

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 Figure 2.1: Proposed Kholo Creek haul route (Department of State Development, Queensland,
Australia, 2003, p.4).
In addition, considerable media publicity has been given to this project (see, for example,
Queensland Government, 2005) concerning the impact of the proposed quarry and the effect on
property prices. The community in the affected areas have had several meetings and campaigned
280
against the proposed project. One form of protest commonly used is for residents to display signs
showing opposition to the project. Protest displays appear from time to time when major
announcements regarding the KHR are made. Other forms of protest in the area have included
signing petitions and distributing flyers to residents and visitors to the area. There is also evidence
that when major announcements such as the KHR are made, the frequency of houses being put up
for sale in the affected areas increase.

It is therefore clear that the surrounding communities, including potential sellers and buyers, have
been aware of the proposed quarry and the hauling routes and the possible adverse impacts since the
proposal was first mooted.

3. Insights from previous studies

The HP value method offers an ideal platform to assess changes in property values in relation to
certain characteristics such as environmental quality (amenities), neighbourhood and structural
characteristics of properties. The theory relating to hedonic property models and its applications are
well known (see, for example, Baranzini et al., 2008). Furthermore, a large number of studies have
used this approach to demonstrate the value of environmental quality reflected via property sales
prices. Their widespread use shows the applicability of the model under different circumstances and
constant improvements where possible and applicable are suggested.

Hedonic studies frequently examine the spatial effects and its popularity has been growing during
the last few decades. In more recent times hedonic models have considered the spatial components
of environmental quality and how they impact on property prices (see for example, Acharya and
Bennett, 2001; Bockstael, 1996; Lewis et al., 2008; Morgan and Hamilton, 2010). These studies
provide evidence that spatial issues, be it environmental quality or the distance to the public
amenities have an impact on property values. However, it should be pointed out that the effects (such
as in the case of environmental quality) largely depend on the severity and magnitude of the problem
affecting residents.

As mentioned earlier, interest in spatial issues in hedonic analysis has been growing, especially in
recent times, with respect to environmental quality and attributes. For example, Shultz and King
(2001) provided evidence to show house prices in close proximity to the large protected natural
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areas, golf courses, class II wildlife habitats, percentage of vacant and commercial land use are
positively related. In contrast Ketkar (1992) has shown that proximity to hazardous waste sites
reduce property prices and a better approximation for clean-up costs can be estimated using a
hedonic method. They suggested that a hedonic implicit price is a good instrument to achieve a
reasonable final agreement between a polluter and affected parties.

Furthermore, the presence of open space and lot size has been shown to be correlated with property
values. A study conducted by Cho et al. (2009) have shown that the marginal effects of lower
housing density, green ways, parks and water bodies were not only positive and significant, but
property values also increased during the 1989-1991 and 1999-2001 time period in the study area.
In their study, temporal and spatial variations with distance to open space and the lot size of the
properties were studied. Lewis et al. (2008) used the hedonic function to estimate the effect of
removal of small-scale dams on the property values on adjacent properties. In this they used the HP
value method to examine the effects of the presence and the removal of hydropower dams on the
Kennebec River in Maine, US, on property prices in adjacent communities. Furthermore, the
presence of open space and lot size has been shown to be correlated with property values. Nicholls
and Crompton (2005) studied the effects of green spaces on property values and saleability. They
found no negative impacts generated by green belts which were found to be neutral or positive. The
presence of green space was considered as a ‘locational attribute’ and, based on this attribute, they
compared two different properties based on direct access and proximity (closeness).

Tapsuwan et al. (2009) have studied the importance of wetlands on property values. In this study
they used ‘distance’ to show the effect of wetlands on property values using HP analysis. In Western
Australia wetlands are under threat due to excessive ground water extraction. The study found that
property values appreciated when houses were located closer to wetlands by AU$ 42.4 for each
metre. Furthermore, the existence of an additional wetland in the vicinity (within 1.5km) increased
property values by AU$ 6976. They concluded that the total sales premium was approximately
AU$140 million.

The hedonic approach is also widely used to show the relationship between various urban
characteristics/provision of improved amenities and property values. These studies have included
undergrounding low-voltage electricity and telecommunications (McNair & Abelson, 2010) and
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street patterns (Randall, 2002), proximity to transit stations and commercial centres (Bowes and
Ihlanfeldt, 2001; Song and Knaap, 200). Decker and Flynn (2007) have shown that construction of
railroads in trans-Mississippi west, USA, had a significant impact on the value of agricultural land in
the area. The results indicated that land values increased due to the construction of railroads due to a
reduction in transportation costs. Rodriguez and Mojica (2009), also showed that a bus rapid transit
system in the Bogota metropolitan area had a significant positive impact on nearby property values.
They attributed the price premium on property values to increased network benefits from mass
transit and station development.

The literature on HP values states that one inherent problem of this approach is that potential buyers
may not have access to the real information so as to make correct decisions. However, in this study
the issue of the proposed haul route has been well known in the area and has received publicity for
more than a decade. As mention earlier, at least two reports have been published on this project. It
can therefore be assumed that buyers in the area had at least partial knowledge of the proposed road
and the likely impacts of the proposed project.

In spite of the many hedonic studies that have been conducted to determine the spatial impacts on
property values there is no published literature that takes into account the impact of a proposed road
on surrounding property values. Kiel and McClain (1996) examined the impact of a failed
incinerator on nearby property prices. The study shows that when the incinerator was proposed,
nearby house values were affected. However, prices recovered after the incinerator proposal was
cancelled. Dehring et al. (2007) investigated the impact of a potential new sports venue on property
values, focusing on the National Footbal league’s Dallas Cowboys’ search for a new host city in the
Dallas-Fort Worth area in the US. They found that residential property prices in the city of Dallas
increased after the announcement of a possible new stadium in the city. On the other hand, property
prices were negatively affected throughout the rest of Dallas County, which would have paid for the
proposed stadium. Interestingly, the property values reversed when the Dallas stadium proposal was
abandoned. The study has many policy implications including that of compensation to affected
parties.

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4. Data and methodology

4.1 Data
Data used in this study covers the period, 1984 to 2010. The period, 1984-2002 was used as the base
period. The real estate data which includes information on sales prices, as well as structural
information about the house and the lot size were obtained from RP Data (RP Data, 2011). RP data
which is subscription-based is the most widely used database on real estate matters in Australia. This
data was double checked for accuracy using another real estate database called Oldlistings which is
an open access database (see, Oldlistings, 2012). By comparing the two databases it was possible to
fill in data gaps. All properties which were one acre in size or less were included in the sample (see,
for example, Provencher et al., 2008). Any outliers, properties with incomplete data were removed
from the sample. A total of 287 house sale data, covering 98 streets, are used in the study. All
properties (houses) within a two kilometre distance to the proposed road are included in the sample.
The property sale data was adjusted for inflation using the CPI index provided by the Australian
Bureau of Statistics (ABS, 2011).

The three suburbs - Chuwar, North Ipswich (upper part) and North Tivoli11 referred to in Section 2
and which are directly affected by the proposed KHR (see Figure 2.1), are covered in the dataset. As
shown in Figure 2.1, the quarry project proposed the construction of option H (Route 4 and 20)
through these suburbs.

As it is well known, the underlying assumption of the hedonic price function is that a residential
property is a collection of attributes where each has an implicit price attached (see, for example,
Freeman, 1971; Freeman, 1979; Rosen, 1974). From the dataset created, it was possible to use
twenty one variables in the hedonic analysis undertaken in this paper.

The specification of the hedonic model follows the classical format of encompassing the structural,
neighbourhood, environmental, locational and socio-economic characteristics of properties. We
include the relevant variables in our study.

11
The suburb of Kholo is not included in the analysis for lack of data. This suburb remains mostly forested.

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Examining the spatial effects is important to this study. The hypothesis in the study is that properties
close to the KHR are likely to witness low property values than those that are located farther from
the affected area. Hence, the spatial distribution of the households was located and estimated using
relevant Google Maps. Further, the property prices are subject to spatial dependence (Anselin, 1988;
Neelawala et al., 2013; Samarasinghe & Sharp, 2010). In this situation, property price of one
location could affect its neighbouring property prices within a considered boundary because they
share similar neighbourhood and locational characteristics. Hence, we also test for the spatial
dependence of property prices using the Lagrange Multiplier Test.

The main focus in this specification is the distance variable given the study hopes to determine the
impact of the announcement of the proposed KHR on surrounding properties. Thompson et al.
(2012) suggests that it is useful to examine such impacts in ‘a pre-and post-treatment model when
feasible’ (p. 221). We considered such an approach. However, the problem is because the
announcement of the proposed quarry was made in 1996 and the data prior to this is very sparse.
Hence, the reason to use the period, 1984-2002 as the base for the year dummies as discussed later.

Table 4.1 describes the variables used in the analysis. Distance to the proposed Kholo haul route is
captured by the distance variable (DISTANCE). The distance variable was calculated using the
aerial distance measuring tool in Google Maps, since noise and dust pollution affect households
directly. Properties up to 5 km away from the proposed haul route have been considered in the
regression analysis. The rest of the variables used are described under the ‘description’ column in
Table 4.1.

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Table 4.1: Definitions of Variables

Variable Description [Expected signs]

CPC Property prices adjusted for inflation
Age of house [have used architectural vintage (period) as a
AGE proxy] [+/-]
BATHROOMS Number of bathrooms [+]
BDROOMS Number of bedrooms [+]
CARPORT Presence of a carport/garage (1: yes, otherwise: 0) [+]
LOGSIZE Log of the size of the land (Square metres) [+]
DIPS Distance to Ipswich (km) [+]
DISTANCE Distance to the KHR (km) [+]
WARREGO Distance to the Warrego Highway (km) [+]
MHI Monthly median household income (Aus $) [+]
MHI2 Squared value of monthly household income [- / +]
RIVER Distance to Brisbane river (km) [+]
PARK Distance to the nearest park (km) [-]
SCHOOL Log of the distance to the school (km) [-]
SUPERM Log of the distance to the supermarket (km) [-]
D_2003 1: if year of sale = 2003, otherwise: 0 [+]
D_2004 1: if year of sale = 2004, otherwise: 0 [+]
D_2005 1: if year of sale = 2005, otherwise: 0 [+]
D_2006 1: if year of sale = 2006, otherwise: 0 [+]
D_2007 1: if year of sale = 2007, otherwise: 0 [+]
D_2008 1: if year of sale = 2008, otherwise: 0 [+]
D_2009 1: if year of sale = 2009, otherwise: 0 [+]
D_2010 1: if year of sale = 2010, otherwise: 0 [+]
Note: Period, 1984-2002 is used as the base period for the year dummies.

The number of bedrooms (BDROOMS) and bathrooms (BATHROOMS) serve as proxies for the
dimension of the house. The inclusion of number of carports/garages (CARPORT) is important since
many households are now in the possession of more than one automobile. This variable includes
both lock up garages and carports as both provide shelter and security to car owners. LOGSIZE is
simply the size of the property and is measured in square metres and is in logs. Distance to the
closest Central Business District (CBD) which is Ipswich is shown by DIPS. Median household
monthly income of the suburb is represented by MHI.

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Distance to supermarkets (SUPERM), schools (SCHOOL) and parks (PARK) represent access to
community and commercial areas. Whilst proximity to supermarkets and schools may be considered
as a basic convenience, proximity to parks represents a recreational amenity. Here the driving
distance was considered. The dummy variables for year of sale (D_2003, D_2004, D_2005, D_2006,
D_2007, D_2008, D_2009, D_2010) are designed to capture any time trend in the housing market.

5. Methodology

In this study we estimate two models. They are ordinary least square (OLS) and spatial mixed (SAC)
models. These models are used to select the best functional form to interpret the marginal
willingness to pay (MWTP) of each characteristic based on the model selection diagnostic [Wald
Test and Likelihood Ratio (LR) Test]. The following model shows the general hedonic specification.

General Hedonic Model

= + + + + + (1)

Equation (1) shows the relationship between the price of property ( ) to its structural ( ), locational
( ), environmental ( ), socio-economic ( ) and neighbourhood ( ) characteristics. This linear
relationship is alternatively used with different functional forms based on the variation of the
predictor variables. Furthermore, the literature relating to the selection of a suitable functional form
is mixed and hence the decision is upon the researcher to find the correct functional form based on
the variation of the data. Our model follows Dickie et al. (1997) who specifies such a model for
cross sectional data and HP models.

= + + + + +
+ + + + 2+ +
+ + + _2003 + _2004 + _2005
+ _2006 + _2007 + _2008 + _2009 + _2010
+ (2)

The possible impact of heteroskedasticity is minimized by using robust standard errors. We first
estimate an OLS model and based on the existence of spatial autocorrelation we use spatial models
287
to obtain more efficient coefficient estimates. Therefore, it is important to test for spatial
dependence. As a first step we use Moran’s I statistic which is later followed by other tests. Moran’s
I statistic could vary from extreme -1 to extreme +1 showing accumulation of dissimilar property
prices (higher property prices are surrounded by lower property prices and vice-versa) and clustering
of similar property prices respectively. It is calculated based on the following equation:

′
∑ ∑ ( )( )
= (3)
(∑ ( − ) (∑ ∑ )

In the above equation , is the row standardised (row sum equal to unity ) weight matrix and , is
the property price. is a N X N symmetric matrix and is a N X 1 column vector. Furthermore,
Moran’s I provides evidence of global spatial autocorrelation. The localised effects of the spatial
dependence need to be confirmed by other diagnostic tests such as the Lagrange multiplier test. The
presence of spatial dependence was confirmed through the Moran’s I statistic and is negative (0.003)
and significant at 12 per cent level of significance. The results are reported in Section 7 (see, Table
7.3). However, previous research shows that Moran’s I is not always consistent and is not based on a
sound theoretical ground. (see, for example, Anselin and Berra, 1998; Li et al. 2007; Jin and Lee,
2010). Hence, we have to use standard post estimation tests such as the Lagrange Multiplier test.

6. Spatial autocorrelation and property prices

Spatial autocorrelation is a problem faced by researchers when analysing spatially dependent data.
House prices, it is believed to be clustered around underlying socio-economic characteristics and
hence are liable to show the effects of spatial autocorrelation (Samarasinghe and Sharp, 2010). In
this study we test and correct for spatial autocorrelation. According to Anselin (1988) the prices of
properties which share neighbourhood characteristics and socio-economic characteristics are not
determined only by the characteristics they have but there is also an effect from the characteristics of
the neighbouring properties. In the presence of spatial autocorrelation, the error term of the hedonic
function is spatially correlated and the estimated coefficients are not efficient. Hence to obtain
efficient estimates, Spatial Lag (SAR), Spatial Error (SEM) and Spatial Mixed models have to be
288
estimated and the most suitable model be used based on Wald and LR test statistics (see, for
example, Mallios et al., 2009). The three spatial models are discussed as follows.

Spatial Lag Model

= + + (4)
( − ) = + (5)
=( − ) +( − ) (6)

In the above model, is the property prices and it is an × 1 column vector. is an × matrix
of explanatory variables. is the row standardized (normalized) diagonal zero inverse-distance
based symmetric spatial weight matrix and is the spatially lagged dependent variable. Also is
an × 1 column vector of coefficients and is the independently and identically distributed error
term with mean 0 and covariance matrix . ( − ) is the spatially autocorrelated error
term.

Spatial Error Model

= + (7)
= + (8)
Where ( − ) is the spatially autocorrelated error term.
Hence;
( − ) = (9)
= ( − ) (10)
So the model to be estimated is:
= +( − ) (11)
Where and λ are assumed to be between -1 and +1. In this case +1 implies strong spatial
autocorrelation (spatial dependence) of property prices or clustering of similar property prices.
Furthermore, -1 implies clustering of dissimilar property prices.

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Spatial Mixed Model

The spatial mixed or spatial autocorrelation model jointly estimates the spatial lag and spatial error
model simultaneously according to the algorithms discussed above. This model specification best
fits our data according to the model diagnostic tests (Wald and LR tests) as will be discussed in
Section 8. The functional form can be given as follows:

=( − ) +( − ) ( − ) (12)

7. Results and discussion

Table 7.2 provides the descriptive statistics of the selected variables and Table 7.3 provides the OLS
estimates.

Table 7.2 presents the descriptive statistics of all the variables used in the empirical analysis. It is
clear that there is a wide variation in house prices in the three suburbs ranging between a maximum
of AUS$ 687,299 and a minimum of AUS$ 53329. The mean house value is AUS$ 314770.4. The
average land size is 1301.23m2. The average number of bathrooms and bedrooms are 1 and 3
respectively. Average distance to the proposed haul route is 1.847km. Average distance to the
Central Business District (DIPS) is 4.9 and the average distance to park, school, river and
supermarket are 1.72 km, 2.6 km, 0.995 km and 2.795 km respectively.

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 Table 7.2: Descriptive statistics

Variable Mean Std. Dev. Min Max

CPC 314770.400 97804.550 53329.000 687299.000
AGE 1958.746 18.144 1920.000 1990.000
BATHROOMS 1.265 0.522 1.000 4.000
BDROOMS 3.080 0.755 1.000 5.000
CARPORT 0.847 0.835 0.000 4.000
DIPS 4.907 1.646 3.000 12.900
WARREGO 1.22 1.39 0.1 8.7
DISTANCE 1.847 1.071 0.200 5.000
SIZE 1301.237 1348.353 65.000 11080.000
MHI 3706.355 831.594 2632.000 6572.000
PARK 1.729 1.009 0.040 5.500
RIVER 0.955 0.549 0.200 4.000
SCHOOL 2.605 1.155 1.000 6.300
SUPERM 2.795 1.767 0.270 7.800
yr2003 0.014 0.117 0.000 1.000
yr2004 0.017 0.131 0.000 1.000
yr2005 0.038 0.192 0.000 1.000
yr2006 0.049 0.216 0.000 1.000
yr2007 0.216 0.412 0.000 1.000
yr2008 0.334 0.473 0.000 1.000
yr2009 0.282 0.451 0.000 1.000
yr2010 0.014 0.117 0.000 1.000
N = 287

In the first stage of the analysis, we estimate the model specified in Equation (2) using an OLS
model, the results of which are shown in Table 7.3. The regression results show that most of the
estimated coefficients have their expected signs and seven variables are statistically significant at the
one per cent level. The distance variable which is the main focus of this study is statistically
significant under two per cent level. It has the expected sign (positive) which means those properties
(houses) that are farther from the proposed haul route have higher property values. The bedroom
variable is significant at less than five per cent level. We discuss these variables in more detail with
MWTP estimates using an appropriate spatial model based on Wald and LR tests.

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 Table 7.3: The results of OLS

Variables OLS I OLS II

Coefficient t-Value Coefficient t-Value
AGE -143.2561 -0.59 -141.752 -0.58
BATHROOMS 37980.93**** 4.52 37952.6**** 4.51
BDROOMS 19579.69**** 3.21 19534.71**** 3.2
CARPORT -4130.509 -0.68 -4270.482 -0.71
WARREGO 21420.43**** 3.31
DIPS 21350.28**** 3.3
DISTANCE 12431.19* 1.92 12654.45** 1.96
LOGSIZE 81640.88**** 4.22 81700.88**** 4.23
MHI -53.65876 -1.34 -50.75334 -1.28
MHI2 0.0063857 1.33 0.0060318 1.27
PARK 4894.656 0.89 4940.24 0.9
RIVER 5240.775 0.63 5254.115 0.63
SCHOOL -6577.083 -0.93 -6516.679 -0.93
SUPERM -8368.692** -2.06 -8418.687 -2.07
yr2003 -74099.33* -1.95 -74243.19* -1.95
yr2004 111512.3**** 3.18 111368**** 3.17
yr2005 86131.66**** 3.09 86332.66**** 3.09
yr2006 112640.9**** 4.2 112841.9**** 4.21
yr2007 157748.8**** 6.84 158105.8**** 6.86
yr2008 171100.3**** 7.59 171443**** 7.61
yr2009 140141.8**** 6.18 140452.4**** 6.19
yr2010 210802.6**** 5.43 210553.6**** 5.43
R2 0.61 0.61
Adj.R2 0.58 0.58

Moran’s I -0.003 1.20(0.115)

**** Significant under 1%, *** Significant under 2%, ** Significant under 5%, * Significant
under 10%.12

As discussed in Section 5, the Moran’s I statistic confirms the existence of spatial autocorrelation.
Because of the existence of spatial autocorrelation it is important to employ one of three spatial

12
In the OLS II regression we provided the results with the distance to Warrego Highway instead of distance to Ipswich
CBDto isolate the effects from the Highway.

292
models discussed in Section 6 for the estimation of MWTP for each attribute. It is important to select
the most appropriate and robust spatial model based on the Lagrange Multiplier and Wald/LR tests.
The results of the Lagrange Multiplier tests are shown in Table 7.4 for SEM and SAR models.

Table 7. 4: Lagrange Multiplier Tests

Test Statistic P-values
LM_Error (SEM) 0.42 0.5173
Robust_LM_Error (SEM) 3.62* 0.0610
LM_Lag (SAR) 0.58 0.4476
Robust_LM_Lag (SAR) 3.78* 0.0520

Based on the above results SAR is appropriate. However, the results from the Wald test for the
Spatial Mixed Model reported in Table 7.5 shows that it is the most appropriate model to be used.
This is because in our initial estimation of the SAR model showed non-significant lower values for
Wald and LR tests. They were 0.518 and 0.516 respectively13. Hence, we use the Spatial Mixed
Model for the estimation of MWTP for each attribute. Note here that the signs of OLS and Spatial
Mixed Model models are similar.

13
Results of the SAR model can be provided upon request.

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Table 7.5: Results for spatial models
Variables Spatial Mixed Model
Coefficient t-Value
AGE -116.644 -0.500
BATHROOMS 39122.970**** 4.950
BDROOMS 20240.950**** 3.510
CARPORT -3658.100 -0.640
DIPS 21367.560**** 3.590
DISTANCE 14246.480*** 2.370
LOGSIZE 83535.170**** 4.500
MHI -33.639 -0.890
MHI2 0.004 0.830
PARK 4924.529 0.970
RIVER 6373.134 0.820
SCHOOL -5875.448 -0.900
SUPERM -9879.394*** -2.550
yr2003 -74914.230** -2.090
yr2004 99505.980**** 2.910
yr2005 84859.630**** 3.200
yr2006 114658.400**** 4.550
yr2007 158648.800**** 7.200
yr2008 168494.500**** 7.720
yr2009 137837.400**** 6.300
yr2010 201865.200**** 5.520

Lambda / Rho -0.23*/0.163* -1.76/1.84

R2 N/A N/A
4.597*
Wald Test SAC Vs. OLS
LR Test SAC Vs. OLS 3.979

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The interpretation of the regression results begin with the most important variable, distance to the
proposed haul route which is shown as DISTANCE. The hypothesis is that buyers would be willing
to pay more for a property to be farther away from the proposed haul route. The coefficient is
positive and it is significant at two per cent probability level. What this means is that buyers are
willing to pay AUS$ 17020 (AUS$17 per metre) more per kilometre to be away from the proposed
road according to the spatial lag process which is selected from the spatial mixed model estimated
(Kim et al., 2003). The calculation of MWTP for the coefficients comes from an infinite series
process of the spatial multiplier,( − ) which adds up to 1/(1 − ) that is used to multiply each
coefficient.

As shown in Equation (2), the property attributes were included in the model. As expected, number
of bathrooms (BATHROOMS) and bedrooms (BDROOMS) are significant at one per cent level.
These results are consistent with other studies (see, for example, Kim et al., 2003; Lewis et al.,
2008). However, age of house and carport variables are not significant. The age variable has a
negative sign. For the age variable we used architectural vintage (period) as a proxy for age. The
sign of the carport variable is also negative. As Abelson (1979) points out this might be due to how it
blends with the architectural structure of the house. However, in general the evidence is mixed (see,
for example, Uyeno et al., 1993; Pompe and Rinehart, 1995).

The distance to the nearest Central Business District (CBD) (variable, DIPS) shows a positive
relationship with property values. It is significant at one per cent probability level. The results show
that property prices increase farther they are away from the Ipswich CBD. This is not surprising
given the higher crime rates, pollution, congestion, lack of open space and existence of commercial
buildings. In other words, such an environment is not conducive to ‘good quality’ residential living.
Kim et al., (2003) show that some of the above factors have a negative relationship with property
values in relation to the distance to CBD. The LOGSIZE variable is significant at the one per cent
level. This indicates that larger properties are priced at a higher rate.

Socio-economic variables were also included in the hedonic function specification that could
increase the explanatory power of the estimated model. Hence, the median monthly household
income (MHI) is included and MHI2 has the expected sign. Property price increases with a

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decreasing rate and after a certain point it tends to increase with an increasing rate with income.
However, this variable is not statistically significant.

With the intention of capturing the environmental/amenity effects on property values, we included
distance to the nearest recreational park (PARK). The variable has a positive sign. Anecdotal
evidence shows that such parks are associated with concentrations of crime and drug taking.
Evidence to this effect is provided by Betts (2001) in the USA. Hence, it is not unexpected for
properties to have lower values than those that are farther away. However, in the model the variable
is statistically insignificant. Furthermore, we included distance to the river (RIVER) variable. The
variable has a positive sign. This may be due to the localised negative spill-over effects from the
river such as flooding. However, the variable is statistically insignificant.

The dummy variables for year of sale show that prices have been appreciating until 2008 and during
the global financial crisis which resulted in a downturn the in the economy in 2009 is reflected in
lower coefficient values. However, the results show that house prices have appreciated in 2010.

We also included SUPERM and SCHOOL variables to examine the effect of public service
capitalization on property prices. As expected they have the correct signs (negative) and distance to
supermarket is significant at one per cent level of significance.

8. Discussion
The regression results have many policy implications. This is especially so with spatial effects. The
results show that property values close to the proposed haul route are likely to be affected compared
to those that are farther away. In other words, the results show that buyers in the area are paying
AUS$ 17020 more per kilometre to be away from KHR.

What is unique about the results is that they show the extent to which property values have been
affected by the announcement of a proposed haul route and the subsequent community agitation
against the creation of the haul route. All are shown to have an impact on property values. The main
policy implication stemming from the regression results is that the numerous proposed projects with
negative externalities announced by State and Federal governments from time to time are likely to
have an impact on property values in the affected areas.

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Interestingly, no compensation exists for loss of property value for owners in affected areas. This
study also shows that community agitation can create uncertainty among buyers by exposing the
adverse impacts of a proposed project.

For projects that are likely to have adverse effects, the results show that the impacts on property
owners are likely to begin from the time they are announced and are likely to be more pronounced, if
and when the project goes ahead. This poses the problem that even if there is compensation, it is
unlikely to apply to loss of property values incurred before the project commenced. Hence, the
results show that projects of this nature may not fully compensate all losses in property values. The
study indicates a need to consider the effects on land values of announcements of proposed projects,
not only from the time the project work commences, but also from the time the preliminary
announcements are made. What is important to note here is that some projects could take decades to
materialize or may not materialize at all. This does not mean that residents in the proposed project
areas are not affected.

9. Conclusions

The paper examined what impact an announcement of a proposed quarry haul route could have on
nearby property values. The available literature on the proposed KHR points to adverse effects
arising from the project. One of the adverse effects mentioned in these reports is the impact on
property values close to the proposed route. However, no evidence is provided. This study uses
hedonic price model, for the first time shows that property values close to the proposed haul route
are affected more than those farther away. In other words, the results of the regression analysis
suggest that the marginal willingness to pay to be farther from the time the proposed road route was
announced is AUS$ 17020 per kilometre. The distance variable is significant at the two per cent
probability level.

The results clearly show that the announcements of proposed projects of this nature are most likely
to affect property values. More importantly, it is shown that property values are affected not only at
the time of commencement of the real project, but at the time the announcements of the proposed

297
projects are made. Public opposition, although done in good faith to prevent the proposed project, in
fact generates publicity which reveals more information about the negative externalities of the
project. Although, availability of information about a project and its negative impacts is good from a
buyer’s point of view, it has an adverse impact on property owners. Equally significant is that the
announcement of a project proposal does not lead to compensation of affected property owners
which would normally only be provided on commencement of the project ironically, there are
dozens (or even hundreds) of such projects that are announced at state and federal level which may
take decades to materialise or in some cases, may be abandoned altogether. This study indicates that
many property owners in these areas will be affected, but are not likely to be compensated. This is
partly because the announcement is only a proposal, but more importantly because until now no
study has clearly provided evidence to show the true extent of the damage. This paper has tried to
shed some light on this issue.

298
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Appendix 4.0

Postcards

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